Question

Yield to maturity and future price A bond has a $1,000 par value, 10 years to maturity, and a 8% annual coupon and sells for $980. What is its yield to maturity (YTM)? Round your answer to two decimal places. % Assume that the yield to maturity remains constant for the next 2 years. What will the price be 2 years from today? Round your answer to the nearest cent. $

Answer 1

Bond Par Value = $ 1000, Tenure = 10 years, Coupon Rate = 8 %, Market Price = $ 980

Let the YTM be R

Annual Coupon = 0.08 x 1000 = $ 80

Therefore, 980 = 80 x (1/R) x [1-{1/(1+R)^(10)}] + 1000/(1+R)^(10)

Using Trial and Error Method (or EXCEL's Goal Seek Function) we get:

R = 0.083 or 8.3 % approximately.

The bond price after two years will be equal to the total PV(present value) of the bond's remaining cash flows(in the form of bond coupons and redemption of par value at maturity) discounted at the YTM of 8.3 %

Therefore, Bond Price after 2 years = 80 x (1/0.083) x [1-{1/(1.083)^(8)}] + 1000/(1.083)^(8) = $ 982.95 or $ 983 approximately.