Question

A 25 year, $1000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $790. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Answer 1

Price of the Bond, 5Years from Now = $ 907.60

Step – 1, Calculate the Yield to Maturity[YTM] of the Bond

Yield To Maturity [YTM] = Coupon Amount + [ (Face Value – Bond Price) / Maturity Years ] / [(Face Value + Bond Price)/2]

= $85 + [ ($1,000 - $790) / 25 ) ] / [($1,000 + $790) / 2]

= [$85 + 8.40 / $895] x 100

= 11%

Step – 2, Calculate the Price of the Bond at 11% , 5 Years from Now

Price of a bond = Present Value of Coupon payments + Present Value of Par Value

= $85 x (PVIF 11%, 5 Years) + $1,000 x (PVF 11%, 5 Years)

= [$85 x 3.6958970] + [$1,000 x 0.593451]

= $ 314.15 + 593.45

= $ 907.60