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Sond X is concallable and has 20 years to maturity, a 10%. annual coupon, and a $1,000 par value. Your required return on Band & is 9%.; 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

Sond X is concallable and has 20 years to maturity, a 10%. annual coupon, and a $1,000 par value. Your required return on Band & is 9%.; 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

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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**Understanding Bond Valuation: A Practical Example** In this example, we will explore how to determine the current price you should be willing to pay for a bond given various conditions and market expectations. --- **Bond X Details:** - **Type:** Non-callable - **Maturity:** 20 years - **Annual Coupon Rate:** 10% - **Par Value:** $1,000 **Your Investment Requirements:** - **Required Return:** 9% - **Investment Horizon:** 5 years **Market Expectations:** - It is expected that the yield to maturity on a 15-year bond with similar risk will be 8.5% in 5 years. **Objective:** Calculate how much you should be willing to pay for Bond X today. --- **Step-by-Step Approach:** 1. **Calculate the Present Value of Future Cash Flows:** - **Coupons:** Calculate the present value of the annual coupon payments for the investment horizon (5 years). - **Principal:** Estimate the bond's price in 5 years and calculate its present value. 2. **Consider Market Yield:** - Use the expected yield (8.5%) after 5 years to estimate the bond’s future value. By following this structured approach, you will be able to determine the fair price to pay for Bond X today, factoring in both your required return and market expectations.
Transcribed Image Text:**Understanding Bond Valuation: A Practical Example** In this example, we will explore how to determine the current price you should be willing to pay for a bond given various conditions and market expectations. --- **Bond X Details:** - **Type:** Non-callable - **Maturity:** 20 years - **Annual Coupon Rate:** 10% - **Par Value:** $1,000 **Your Investment Requirements:** - **Required Return:** 9% - **Investment Horizon:** 5 years **Market Expectations:** - It is expected that the yield to maturity on a 15-year bond with similar risk will be 8.5% in 5 years. **Objective:** Calculate how much you should be willing to pay for Bond X today. --- **Step-by-Step Approach:** 1. **Calculate the Present Value of Future Cash Flows:** - **Coupons:** Calculate the present value of the annual coupon payments for the investment horizon (5 years). - **Principal:** Estimate the bond's price in 5 years and calculate its present value. 2. **Consider Market Yield:** - Use the expected yield (8.5%) after 5 years to estimate the bond’s future value. By following this structured approach, you will be able to determine the fair price to pay for Bond X today, factoring in both your required return and market expectations.
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