Bond valuation Bond X is noncallable and has 20 years to maturity, a 8% annual c
ID: 2741618 • Letter: B
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 8%; 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.) Do not round intermediate calculations. Round your answer to the nearest cent.
Explanation / Answer
We need to calculate the bond price using the discount rate of 8%
Par value=1000
Coupon rate=8%
Time =5 years
Annual coupon=80
Bond price=Present value of coupon payment +Present value of par value
Bond price=80/(1+.08)……………………80/(1+.08)^5 +1000/(1+.08)^5
Bond price=1000
Price at the end of five years is $1000.