Question

A 20-year, $1,000 par value bond has a 9% semi-annual coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 8 years from now?

a.

$937.7

b.

$956.95

c.

$939.85

d.

$503.21

Answer 1

Coupon = (0.09* 1,000) / 2 = 45

Number of periods = 20 * 2 = 40

Yield to maturity = 9.8662%

Keys to use in a financial calculator: 2nd I/Y 2, FV 1000, N 40, PV -925, PMT 45, CPT I/Y

YTM = 9.8662% / 2 = 4.9331%

Number of periods = 12 * 2 = 24

Price = Coupon * [1 - 1 / (1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Price = 45 * [1 - 1 / (1 + 0.049331)²⁴] / 0.049331 + 1,000 / (1 + 0.049331)²⁴

Price = 45 * 13.888888 + 314.847263

Price = $939.85

Keys to use in a financial calculator: 2nd I/Y 2, FV 1000, N 24, I/Y 9.8662, PMT 45, CPT PV