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 Summary
Solution describes the steps to estimate price of coupon paying bonds.
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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
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Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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