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 10 years from now?

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =25

875 =∑ [(8.5*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^25

k=1

YTM% = 9.86

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =15

Bond Price =∑ [(8.5*1000/100)/(1 + 9.86/100)^k]     +   1000/(1 + 9.86/100)^15

k=1

Bond Price = 895.73