Question

smith inc. bond will mature in 20 years and currently yield of 8% and a coupon rate of 10%, assume the bond is semi-annually compounding. What will the price be 5 years from now?

Answer 1

Given about Smith Inc.'s bond,

years to maturity = 20 years

Current yield = 8%

coupon rate = 10% paid semiannually,

Face value = $1000

=> semiannual coupon payment = (10%/2) of 1000 = $50

Current yield = 8%

=> Current yield = 2*semiannual coupon/Price

=> Price = 2*50/0.08 = $1250

Based on the price, YTM of the bond is calculated on financial calculator using following values:

FV = 1000

PV = -1250

PMT = 50

N = 2*20 = 40

Compute for I/Y, we get I/Y = 3.778

So, Annual YTM of the bond = 2*3.778 = 7.56%

After 5 years, remaining years to maturity = 15 years,

So, price of the bond is calculated on financial calculator using following values:

FV = 1000

PMT = 50

N = 2*15 = 30

I/Y = 3.778

compute for PV, we get PV = -1217.07

So, price of the bond after 5 years is $1217.07