Question
A 15-year corporate bond has a par value of $100,000 and a 4.5% annual coupon rate. Assume that your required rate of return is 8%
A 15-year corporate bond has a par value of $100,000 and a 4.5% annual coupon rate. Assume that your required rate of return is 8% and that you plan to hold onto this bond for 10 years. You and the market have expectations that in 10 years the yield-to-maturity for this bond (or another bond with similar risk and maturity) will be 10%. How much are you willing to pay for this bond today?
(Hint: You will need to know how much you can sell the bond for at the end of 10 years. Then you must use this value to determine how much you would be willing to pay for it today! So, Step 1 is to find the value of the bond in 10 years -> N=5,...Basically, suppose you are buying the bond today with the expectation of selling it in 10 years. And, you want to earn 8% APR on this investment/transaction. So, if you can figure out how much you should be able to sell it for in 10 years, then you can figure out how much to pay for it today to make sure you get your 8%.)
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