Question

BOND VALUATION Bond X is noncallable and has 20 years to maturity, a 11% annual coupon, and a $1,000 par value. Your required return on Bond X is 10%; 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.

Answer 1

Calculate the value of the bond at the end of the fifth year as follows:

X in f =PV(7%,15,-1000*11%,-1000) Function Arguments ? X PV Rate 7% 15 Nper Pmt -1000*11% Fv -1000 Type * * * = 0.07 = 15 = -110 = -1000 = number = 1364.31656 Returns the present value of an investment: the total amount that a series of future payments is worth now. Type is a logical value: payment at the beginning of the period = 1; payment at the end of the period = 0 or omitted. Formula result = $1,364.31656 Help on this function OK Cancel

Value is $1,364.31656

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Calculate the value of the bond as follows:

X fx =PV(10%,5,-1000*11%,-1364.31656) Function Arguments ? X PV Rate 10% Nper 5 Pmt -1000*11% Fv -1364.31656 Type * * * = 0.1 = 5 = -110 = -1364.31656 | = number = 1264.119788 Returns the present value of an investment: the total amount that a series of future payments is worth now. Fv is the future value, or a cash balance you want to attain after the last payment is made. Formula result = $1,264.11979 Help on this function D OK Cancel

Value of the bond is $1,264.12.

Answer 2

110(1-(1+0.07)^-15/ 0.07 + 1000/(1+0.07)^15

value at the end of the fifth year =1364.31 

110(1-(1+0.1)^-5/0.1 +1364.31/(1+0.1)^5

value of the bond is = 1263.92