Question

# Bond X is noncallable and has 20 years to maturity, a 10% annual coupon, and a...

Bond X is noncallable and has 20 years to maturity, a 10% annual coupon, and a \$1,000 par value. Your required return on Bond X is 9%; if you buy it, you plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 9%. How much should you be willing to pay for Bond X today? (Hint: You will need to know how much the bond will be worth at the end of 5 years.) Do not round intermediate calculations. Round your answer to the nearest cent.

Price of the bond = Sum of PV of all the cash inflows

Price of the bond at the end of 5 years = Sum of PV of all the cash inflows from year 6 to year 20

Please refer to the table for the calculations-

 Time Cash Inflows PV of cash inflows @9% interest rate 6 100 59.6 7 100 54.7 8 100 50.2 9 100 46.0 10 100 42.2 11 100 38.8 12 100 35.6 13 100 32.6 14 100 29.9 15 100 27.5 16 100 25.2 17 100 23.1 18 100 21.2 19 100 19.4 20 1100 196.3 Price at the end of 5 years 702.3

We will be willing to pay \$702.3 for Bond X today

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