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    Estimating the price of a bond

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    Bond X is a premium bond making annual payments. The bond pays an 13 percent coupon, has a YTM of 9 percent, and has 24 years to maturity. Bond Y is a discount bond making annual payments. This bond pays a 9 percent coupon, has a YTM of 13 percent, and also has 24 years to maturity. If interest rates remain unchanged, you would expect that 6 years from now, Bonds X and Y will be priced at $? and $?, respectively. And in 11 years: $? and $?.

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    Solution Preview

    Let us assume Par Value of each bond=P=$1000

    At the end of 6 years

    In the case of Bond X
    Number of coupon payments left=n=24-6=18
    YTM=r=9% annual
    Coupon amount=1000*13%=$130

    Price at the end of 6 years=C/r*(1-1/(1+r)^n)+P/(1+r)^n
    =130/9%*(1-1/(1+9%)^18)+1000/(1+9%)^18
    ...

    Solution Summary

    Solution describes the steps to estimate price of coupon paying bonds.

    $2.19