Question

Bond X is noncallable and has 20 years to maturity, a 11% annual coupon, and a $1,000 par value. Your required return on Bond X is 9%; and 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 9.5%. 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.) Round your answer to the nearest cent.

Answer 1

Firstly here we need to calculate present value of Bond price in 5 year

use formula of Present Value (PV) in excel

where:

rate = 9.5%

nper = 15 Year

pmt = 110 (1000*11%) (Coupon)

fv = 1000

Now to calculate the amount that we will ready to pay today we need to calculate Present value of Bond Price

Amount willing to be paid now = Coupon amount x Cumulative present value factor at 9% for 5 years + value after 5 years x present value factor at 9% for 5 year

Or

where:

rate = 9%

nper = 5 Year

pmt = 110 (1000*11%) (Coupon)

fv = $1117.42

I hope this clear your doubt.

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