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