Bond valuation Bond X is noncallable and has 20 years to maturity, a 8% annual c

Question

Bond valuation

Bond X is noncallable and has 20 years to maturity, a 8% annual coupon, and a $1,000 par value. Your required return on Bond X is 11%; 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 11%.

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.

Bond valuation

You are considering a 20-year, $1,000 par value bond. Its coupon rate is 8%, and interest is paid semiannually. If you require an "effective" annual interest rate (not a nominal rate) of 10.94%, how much should you be willing to pay for the bond? Do not round intermediate steps. Round your answer to the nearest cent.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Nper = 15 (indicates the period)

PV = ? (indicates the price)

FV = 1000 (indicates the face value)

Rate = 11% (indicates rate of interest)

PMT = 80 (indicates the amount of interest payment)

Price = PV(Rate,Nper,PMT,FV) = PV(11%,15,80,1000) = $784.27

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Part B:

Nper = 20*2 = 40 (indicates the period)

PV = ? (indicates the price)

FV = 1000 (indicates the face value)

Rate = 10.94%/2 (indicates rate of interest)

PMT = 80/2 =40 (indicates the amount of interest payment)

Price = PV(Rate,Nper,PMT,FV) = PV(10.94%/2,40,40,1000) = $763.19

Thanks.

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