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?

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04-04-2022
Mathematics

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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?

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ewomazinoade ewomazinoade · Answer 1 · 2022-04-06T12:35:52+02:00

Given the current yield to maturity of the bond, the price of the bond five years for now is $883.10.

What is the price of the bond five years from now?

The first step is to determine the yield to maturity of the bond. The yield to maturity is the return on the bond if the bond is held to matuity.

Yield to matuity can be determined using a financial calculator:

Cash flow in year 0 = -875

Cash flow each year from year 1 to 25 = 85

Cash flow in year 25 = $1000

Yield to matuity = 9.86%

Future price of the bond: (coupon x future price factor) + [FV / (1 + YTM)^n)]

Future price factor = [1 - (1/YTM)^n] / YTM

= [1 - 1/0.0986^20] 0.0986 = 8.595555

[85 x 8.595555 ] + 152.478323 = $883.10

To learn more about yield to maturity, please check: https://brainly.com/question/26484024