A 20-year bond with a par value of $1,000 has a 9 percent annual coupon. The bond currently sells for $925. If the bond's yield to maturity remains at its current rate, what will be the price of the bond 5 years from now?

Question

Quizplus · Accepted Answer

We can use the formula for present value of a bond to find the bond's yield to maturity:
$925 = \frac{90}{(1+y)^1} + \frac{90}{(1+y)^2} + \frac{90}{(1+y)^3} + \frac{90}{(1+y)^4} + \frac{1090}{(1+y)^5}$
Using a financial calculator or spreadsheet, we find that the yield to maturity is approximately 9.759%.
To find the price of the bond 5 years from now, we can use the formula for future value of a bond:
$FV = \frac{90}{(1+y)^4} + \frac{90}{(1+y)^3} + \frac{90}{(1+y)^2} + \frac{90}{(1+y)^1} + \frac{1000}{(1+y)^0}$
Plugging in the yield to maturity we just found, we get:
$FV = \frac{90}{1.09759^4} + \frac{90}{1.09759^3} + \frac{90}{1.09759^2} + \frac{90}{1.09759^1} + \frac{1000}{1.09759^0} \approx \$933.09$
Therefore, the best choice is D.

A 20-Year Bond with a Par Value of $1,000 Has