Question

Consider a $1,000 par value bond with a 9% annual coupon. The bond pays interest annually....

Consider a $1,000 par value bond with a 9% annual coupon. The bond pays interest annually. There are 20 years remaining until maturity. You have expectations that in 5 years the YTM on a 15-year bond with similar risk will be 7.5%. You plan to purchase the bond now and hold it for 5 years. Your required return on this bond is 10%. How much would you be willing to pay for this bond today?

Select one:

a. $1044

b. $ 962

c. $1132

d. $ 988

e. $1153

Homework Answers

Answer #1
The value of bond is the Present Value of of all the expected future cash flows
Par Value of bond $1000
Annual Coupon rate 9%
Required rate of return 10%
Annual interest ( 1000*9%) $90
Discounted Factor for 5 years(PVIAF) 3.79078676
( = 1/1.10^1+1/1.10^2+1/1.10^3+1/1.10^4+1/1.10^5)
Discounted Factor of year 5th ( PVIF) 0.6209213
( = 1/1.10 ^5 )
Value of Bond = $90 * PVIAF ( 10% , 5 year ) + $ 1000 PVIF (10% , 5 year )
      = $90 * 3.79078676 + $1000 * 0.6209213
      = $341.1708 + $620.9213
      = $962
We willing to pay $962 for this bond today
Option B - $962
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