Question

YIELD TO MATURITY AND FUTURE PRICE

A bond has a $1,000 par value, 7 years to maturity, and a 9% annual coupon and sells for $1,095.

1. What is its yield to maturity (YTM)? Round your answer to two decimal places.
   
      %
   
2. Assume that the yield to maturity remains constant for the next 3 years. What will the price be 3 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.
   
   $

Answer 1

Par value of bond				1000
Annual Interest (1000*9%)				90
Annuity PVF for 7 yrs at 7.22%				5.3482
PVF for 7th year at 7.22%				0.61386
Present value of Interest				481.338
Present value of maturity value				613.86
Price of bonds				1095.198
Therefore, YTM = 7.22%
Now, after 3 yrs,
n = 4
I = 7.22%
Casflows			Amount	PVF	Present value
Annual interest			90	3.37046	303.3414
Principal			1000	0.756653	756.653
Price of bonds					1059.994
Price after 3 yrs = 1060.