Question

A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will be price be 7 years from now?

*Mention the excel functions you used and the value of each input you entered

Answer 1

First we need to find the yield to maturity as on today. Use RATE function in EXCEL

=RATE(nper,pmt,pv,fv,type)

nper=25 years

pmt=coupon rate*face value=8.5%*1000=85

pv=875

fv=face value=1000

=RATE(25,85,-875,1000,0)=9.86%

Now after 7 years, the time to maturity becomes=18 years (25 years-7 years)

To find the price , use PV function

=PV(rate,nper,pmt,fv,type)

rate=9.86%

nper=18 years

pmt=85

fv=1000

=PV(9.86%,18,85,1000)=$887.26

The price of the bond after 7 years=$887.26