Question

In: Finance

Bond X is noncallable and has 20 years to maturity, a 9% annual coupon, and a...

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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Solutions

Expert Solution

Calculating Selling Price of Bond in 5 years,

Using TVM Calculation,

PV = [FV = 1,000, PMT = 90, N = 15, I = 0.085]

PV = $1,041.52

Calculating Price of Bond today,

Using TVM Calculation,

PV = [FV = 1,041.52, PMT = 90, N = 5, I = 0.10]

PV = $987.87

Bond Price today = $987.87


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