1 answer

BOND VALUATION Bond X is noncallable and has 20 years to maturity, a 11% annual coupon,...

Question:

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

BOND VALUATION 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 10%; 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 7%. 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.

Answers

Calculate the value of the bond at the end of the fifth year as follows:

X in f =PV(7%,15,-1000*11%,-1000) Function Arguments ? X PV Rate 7% 15 Nper Pmt -1000*11% Fv -1000 Type * * * = 0.07 = 15 = -

Value is $1,364.31656

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Calculate the value of the bond as follows:

X fx =PV(10%,5,-1000*11%,-1364.31656) Function Arguments ? X PV Rate 10% Nper 5 Pmt -1000*11% Fv -1364.31656 Type * * * = 0.1

Value of the bond is $1,264.12.

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