Question

You are reviewing a $1,000 par value bond that pays 6.8% semi-annual coupon interest, and has 10 years before it matures.

1a. You (and other investors) currently require a nominal annual rate of 7.5 percent for this bond. In other words, the comparable bonds have a YTM of 7.5%. How much should you be willing to pay for this bond today?\

1b. If you buy this bond today and hold it for 5 years. You are planning to sell it in the secondary market at the end of 5 years. Assume you expect the market to require a nominal rate of only 6.3 percent when you sell the bond (in 5 years) due to a general decline in interest rates. This is due to the company performed well during this 5 years and its riskiness for debt is reduced.

How much should you be willing to charge for this bond 5 years from today? Note: Since you will be selling this bond in 5 years in the secondary market to another investor, you are not holding the bond to its maturity date in 10 years. Assume there is no transaction cost.

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