Question

g Your grandfather purchased a $1,000 face-value bond 10 years ago. When he purchased the bond, it had 30 years to maturity and a coupon rate of 5% paid annually. Now you want to sell the bond and read that the yield on similar bonds is 4.93%. What can you sell the bond for today

Answer 1

Answer:

You can sell the bond for $1,008.78 today

Explanation:

We need to calculate current value of the bond & its coupon

Face value: $1,000

Left tenor: 20 years (= 30 years to maturity - 10 years ago)

Coupon rate: 5%

Yield to maturity: 4.93%

Total coupon to be paid every year= $1,000* 5%  = $50

To calculate the current value of coupon received in every of 20 years, we use formula PV in excel or manually as below:

PV = 50/(1+4.93%)^20 + 50/(1+4.93%)^19+.... +50/(1+4.93%)^1 = $626.83

The current value of face value after 20 years = $1,000/(1+4.93%)^20 = $381.95

So the value of bond = $626.83 + $381.95 = $1,008.78