Question

Consider a $1,000 par value bond with a 9% 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%. You plan to purchase the bond now and hold it for 5 years. Your required return on this bond is 10%. How much would you be willing to pay for this bond today

Answer 1

Answer:

The multiple choices are:

a. $1132

b. $1044

c. $ 962

d. $1153

e. $ 988

The correct option is C,$962

Explanation:

The price a rational and prudent investor like me would be willing to pay for the bond today is the present worth of future cash inflows receivable from the bond issuer,which comprises of annual coupon interest and the face value at maturity.

=-pv(rate,nper,pmt,fv)

rate is required rate of return expected by investor of 10%

nper is 5 years since the investor intends to hold the bond for 5 years

pmt is the annual coupon interest=$1000*9%=$90

fv is the face value of $1000

=-pv(10%,5,90,1000)=$962.09

The current  price is $962