A 25-year, $1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Question

Quizplus · Accepted Answer

First, we need to calculate the current yield to maturity (YTM) based on the given information. Using a financial calculator or Excel, we can solve for the YTM as follows:

N = 25 (since it's a 25-year bond)
PMT = 85 (8.5% annual coupon rate * $1,000 par value)
FV = 1,000 (par value)
PV = -875 (current market price)
Solving for I/Y = 10.96%

Next, we need to calculate the future value of the bond in 5 years based on the YTM we just calculated. Again, using a financial calculator or Excel, we can solve for the future value (FV) as follows:

N = 20 (since we're looking 5 years into the future, which is 20 years from the bond's original maturity date)
PMT = 85 (same as before)
FV = -1,000 (since the bond will be redeemed at par value when it matures)
PV = 875 (current market price)
I/Y = 10.96% (same as before)
Solving for FV = $882.90

Therefore, the best choice is (C) $882.90, as this is the expected price of the bond 5 years from now based on the current yield to maturity.

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