5A. Bond valuation Bond X is noncallable and has 20 years to maturity, a 8% annu

Question

5A. 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 10%; 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 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.

Explanation / Answer

Given;

Coupan rate = 8%

Par value = $1,000

Years / Period = 5

YTM/Rate = 10%

Interest Amount =$1,000 x 8% = $80

Present value = ??

Let the present value be "P"

Using the formula;

0.10 = {80 + (1,000 - P) / 5} / (1,000 +P) / 2

P = $920

Therefore, today the amount should be paid $920 for Bond X.

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