How much should you be willing to pay for a 20-year, $50-coupon bond today?
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You are contemplating the purchase of a 20-year bond that pays $50 in interest each six months. You plan to hold this bond for only 10 years, at which time you will sell it in the market place. You require a 12 percent annual return, but you believe the market will require only an 8 percent return when you sell the bond 10 years hence. How much should you be willing to pay for the bond today?
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Solution Summary
This solution provides an Excel file attached for all the details and steps. I have also provided a depiction of timeline and cash flows for better understanding of the calculations. It has to be treated as two bonds, one in after-holding period and calculate value at the end of year 10 or period 20. The other with bond in holding period while calculating PV.
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Please see the excel file attached for all the details and steps. I have also provided ...
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