ANSWER QUESTION 2

Exercise ST-1 and ST-2 Problems: 5, 8, 9, 10, 13, and 15* Problem 15: bond X has 20 years to maturity, a 9% annual coupon, and a $1,000 face value. The required rate of return is 10%. Suppose you want to buy the bond and you plan to hold the bond for 5 years. You expect that in 5 years, the yield to maturity on a 15-year bond with similar risk will be priced to yield 8.5%. How much would you like to pay for the bond today? 90 1 90 5 90 6 90 19 1,000 90 20 0 PVs =1,041.52 (I/YR=8.5%, PMT=90, N=15, FV=1,000) PV= 987.87 (I/YR=10%, PMT=90, N=5, FV=1,041.52) Answer: Step 1: figure out what should be the fair value of the bond after 5 years (PV) Step 2: figure out what should be the fair value of the bond now (PV)