Question

Bond X is noncallable and has 20 years to maturity, a 9% annual coupon, and a $1,000 par value. Your required return on Bond X is 10%; if you buy it, you plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 8.5%. How much should you be willing to pay for Bond X today? (Hint: You will need to know how much the bond will be worth at the end of 5 years.) Do not round intermediate calculations. Round your answer to the nearest cent.

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Answer 1

Calculate the price of the bond at the end of 5th years as follows:

Price at the end of the 5th year is $1,041.5212.

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Calculate the price you will be willing to pay as follows:

Price willing to pay is $987.87.