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?
Please see the excel file attached for all the details and steps. I have also provided ...
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.