Question

Bond prices and maturity dates. Moore Company is about to issue a bond with monthly coupon ​payments, an annual coupon rate of 8​%, and a par value of $5,000.The yield to maturity for this bond is 9​%

a. What is the price of the bond if it matures in 5​,10,15​,20 ​years?

b. hat do you notice about the price of the bond in relation to the maturity of the​ bond?

Answer 1

a). Bond prices can be found using PV function as follows:

Maturity of bond (in years)	5	10	15	20
Par value (Future value)	5,000	5,000	5,000	5,000
Annual coupon rate	8%	8%	8%	8%
Monthly coupon rate	0.67%	0.67%	0.67%	0.67%
Monthly coupon payment	33.33	33.33	33.33	33.33
Annual YTM	9%	9%	9%	9%
Monthly YTM	0.75%	0.75%	0.75%	0.75%
Number of coupon payments (N) in months	60	120	180	240
Price of bond	4,799.28	4,671.08	4,589.19	4,536.90

Formulas:

b). As can be seen from the table, bond price decreases as maturity increases. This is so because as maturity increases, risk increases as well, so price falls.