Question

Yield to maturity and future price

A bond has a $1,000 par value, 12 years to maturity, and a 8% annual coupon and sells for $980.

1. What is its yield to maturity (YTM)? Round your answer to two decimal places.
   
      %
   
2. Assume that the yield to maturity remains constant for the next 5 years. What will the price be 5 years from today? Round your answer to the nearest cent.
   
   $   
   

Answer 1

a.Information provided:

Par value= future value= $1,000

Present value= $980

Time= 12 years

Coupon rate= 8%

Coupon payment= 0.08*1,000= $80

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -980

N= 12

PMT= 80

Press the CPT key and I/Y to calculate the yield to maturity.

The value obtained is 8.27.

Therefore, the yield to maturity is 8.27%.

b.Information provided:

Par value= future value= $1,000

Time= 5 years

Coupon rate= 8%

Coupon payment= 0.08*1,000= $80

Yield to maturity= 8.27%

The price of the bond 5 years from now is calculated by computing the present value of the bond.

The present value of the bond is computing by entering the below in a financial calculator:

FV= 1,000

N= 5

PMT= 80

I/Y= 8.27

Press the CPT key and PV to compute the present value of the bond.

The value obtained is 989.30.

Therefore, the price of the bond 5 years from now is $989.30.

In case of any further queries, kindly comment on the solution.