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 12%; 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%. 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.

Answer 1

Given the following data,

Face Value = $1,000

Coupon rate = 9%

Required return = 12%

Years to maturity = 20

Interest rate at the end of the fifth year = 8%

Step 1: Calculating the price of the bond with 15 years of maturity:

We get 1085.59

Step 2: Calculating the price of the bond today with 5 years of maturity:

Price of the bond today is 940.43

Thus, the amount you will be paying for the bond X today is $940.43