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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

BOND VALUATION Bond X is noncallable and has 20 years to maturity, an 8% annual coupon, and a $1,000 par value. Your required return on Bond X is 9%; if you buy it, you plan to hold it for 5 years. You (and the market) have exportations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 7.5%. How much should you be willing to pay for Bond X today? (Hint You will need to know how much the bond will be worth at the end of 5 years.)

Summary Introduction

To identify: Present value of bond X.

Bond Valuation:

Bond valuation refers to the evaluation of bonds value at any point of time, which can be used for decision making. Valuation of the bond is done for comparison and analysis.

Explanation

Interest rate is 9% or 0.09.

Yield to maturity (YTM) is 7.5%.

Par value of bond is $1,000.

Maturity is after 15 years for bond X.

Formula to calculate present value of bond,

Bond'svalue=t=1NINT(1+rd)t+Parvalue(1+rd)N

Where,

  • INT is Interest rate
  • N is number of year for maturity

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