g A 15-year corporate bond has a par value of $10,000 and a 7% annual coupon rate. Assume that your required rate of return is 11% and that you plan to hold onto this bond for 10 years. You and the market have expectations that in 10 years the yield-to-maturity for this bond (or another bond with similar risk and maturity) will be 9%. How much are you willing to pay for this bond today?

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18 November, 20:30

g A 15-year corporate bond has a par value of $10,000 and a 7% annual coupon rate. Assume that your required rate of return is 11% and that you plan to hold onto this bond for 10 years. You and the market have expectations that in 10 years the yield-to-maturity for this bond (or another bond with similar risk and maturity) will be 9%. How much are you willing to pay for this bond today?

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Patterson · Answer 1

In this question we are faced with a question which rate to use as the bonds YTM, either 11% or 9% but we will in this question use 11% because the question asks us how much are we willing to pay for the bond, and not its expected market price. So to find what we are willing to pay we will input these values in a financial calculator

FV=10,000

PMT = (0.07*10,000) = 700

R = 11%

N=10

Compute PV

PV=7,644

We will be willing to pay $7,644 for this bond