Question

Suppose that today you buy a bond with an annual coupon rate of 8 percent for $1,060. The bond has 15 years to maturity. Assume a par value of $1,000. Two years from now, the YTM on your bond has increased by 1 percent, and you decide to sell. Assume semiannual compounding periods. What price will your bond sell for after 2 years?

In Excel Please

Answer 1

First, we have to calculate the YTM of the bond using the purchase information.

YTM =rate(nper,pmt,pv,fv) in excel where nper =15, pmt =8% of 1000 = 80, pv =1060 and fv =1000

YTM =rate(15,80,-1060,1000) = 7.3275%

After two years, the YTM increases by 1%, so YTM at the time of sale = 7.3275% = 1% = 8.3275%

To calculate the price we use PV() function in excel as in =PV(rate,nper,pmt,fv) where rate = 0.083275, nper = 15-2 =13, pmt =80, fv =1000

Price after two years =PV(0.083275,13,80,1000) = 974.57

The price at which you will sell the bond after 2 years = $974.57