Question

Bond valuation Bond X is noncallable and has 20 years to maturity, a 9% annual coupon, and a $1,000 par value. Your required return on Bond X is 12%; and 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 9.5%. 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.) Round your answer to the nearest cent.

Answer #1

C | D | |

4 | Yield to maturity | 15 |

5 | coupon amount (PMT) = 9%*1000 | 90 |

6 | Face value (FV) | 1000 |

7 | Yield rate | 9.50% |

8 | ||

9 | Present value | $960.859125 |

OR PV | 960.86 | |

C | D | |

15 | Yield to maturity | 5 |

16 | coupon amount (PMT) = 9%*1000 | 90 |

17 | Face value (FV) | 960.859125 |

18 | Yield rate | 12.00% |

19 | ||

20 | Present value | $869.64713 |

WILLING PAY
AT |
869.65 |

C | D | |

4 | Yield to maturity | 15 |

5 | coupon amount (PMT) = 9%*1000 | 90 |

6 | Face value (FV) | 1000 |

7 | Yield rate | 0.095 |

8 | ||

9 | Present value | =-PV(D7,D4,D5,D6) |

OR PV | 960.86 | |

C | D | |

15 | Yield to maturity | 5 |

16 | coupon amount (PMT) = 9%*1000 | 90 |

17 | Face value (FV) | 960.859125 |

18 | Yield rate | 0.12 |

19 | ||

20 | Present value | =-PV(D18,D15,D16,D17) |

WILLING PAY
AT |
869.65 |

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