Question

A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Answer #1

**Step 1:
Calculation of Yield to Maturity (YTM)**

Yield to Maturity (YTM) can be calculated as

**( interest per annum +
average other cost per annum ) / average fund employed**

Where

**average other cost per
annum** = (Redemption price - current market
price)/remaining life

= (1000 - 875) / 25

**= 5**

**average fund employed
=** (Redemption price + current market price)/2

= (1000+875)/2

**=937.5**

**Yield to Maturity
(YTM)** = (85 + 5) / 937.5

= .096

**= 9.6%**

**Step 2:
Calculation of price be 5 years from now**

The value of bond is the p**resent value** of the
**expected future cashflows** from the bond,discounted
at Yield to Maturity**(YTM)**.

Year |
Cash flow |
PVAF/[email protected]% |
Present Value
(Cashflow*PVAF/PVF) |

1-20 | 85 | 8.7513* | 743.86 |

20 | 1000 | 0.1599** | 159.90 |

**Current Market Price of Bonds
= $903.76** (743.86+159.9)

*PVAF = (1-(1.096)^^{-20})/.096 = 8.7513

**PVF = 1 / (1.096)^{20} = 0.1599

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*Mention the excel functions you used and the value of each
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%
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$

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