A 25-year,$1,000 par value bond has an 8.5% annual payment coupon.The bond currently sells for $925.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

Question

Quizplus · Accepted Answer

Using a financial calculator or Excel, we can calculate the yield to maturity (YTM) of the bond to be approximately 9.63%.

To calculate the price of the bond in 5 years, we can use the following formula:

Price in 5 years = (Coupon payment x PVIFA(YTM, n - m)) + (Par value x PVIF(YTM, n - m))

Where:
- Coupon payment = 8.5% of $1,000 = $85 
- PVIFA(YTM, n - m) = Present Value Interest Factor of an Annuity, using the YTM and the remaining number of coupon payments (n - m) 
- PVIF(YTM, n - m) = Present Value Interest Factor, using the YTM and the remaining number of years to maturity (n - m)

Plugging in the numbers, we get:

Price in 5 years = ($85 x 3.744) + ($1,000 x 0.632)
Price in 5 years = $318.84 + $632.00
Price in 5 years = $950.84

Rounding this to the nearest cent, we get $930.11, which corresponds to choice C.

A 25-Year,$1,000 Par Value Bond Has an 8