BOND VALUATION Bond X is noncallable and has 20 years to mat

BOND VALUATION Bond X is noncallable and has 20 years to maturity, a 10% annual coupon, and a $1,000 par value. Your required return on Bond X is 8%; 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 8%. 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. $

Solution

Bond Price 5 years from now = 1000*10%*PVAF(8%, 15years) + 1000*PVF(8%, 15 years) = $1,171.19

Current Value of the Bond = 1000*10%*PVAF(8%, 5years) + 1171.19*PVF(8%, 5 years) = $1,079.85