Consider a $1,000 par value bond with a 7% annual coupon. The bond pays interest

Question

Consider a $1,000 par value bond with a 7% annual coupon. The bond pays interest annually. There are 20 years remaining until maturity. You have expectations that in 5 years the YTM on a 15-year bond with similar risk will be 7.5%.

What is the expected bond value in 5 years? Please show how to calcuate the problem with a Financial Calculator

a) $956

b) $1042

c) $1132

d) $1153

e) $949

Consider a $1,000 par value bond with a 7% annual coupon. The bond pays interest annually. There are 20 years remaining until maturity. You have expectations that in 5 years the YTM on a 15-year bond with similar risk will be 7.5%.

Explanation / Answer

Coupon (PMT)= 7% of 1000 = 70

After 5 years, discount rate (I/Y)= 7.5% (YTM for similar risky bond of same maturity)
Future Value of bond (FV) = $1000
Time remaining to maturity (N) =15

In financial calculator, feed values PMT = 70, I/Y = 7.5, FV=1000, N=15,
and press CPT and then PV
PV = $956
Hence answer is (a)

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