A bond has a $1,000 par value, 12 years to maturity, and an 8% annual coupon and sells for $980

Finance Apr 02, 2021

A bond has a $1,000 par value, 12 years to maturity, and an 8% annual coupon and sells for $980. What is its yield to maturity? Assume that the yield to maturity remains constant for the next three years. What will the price be three years from today?

Expert Solution

Computation of Yield to Maturity using Rate Function in Excel:

=rate(nper,pmt,-pv,fv)

Here,

Rate = Yield to Maturity = ?

Nper = 12 years

PMT = $1,000*8% = $80

PV = $980

FV = $1,000

Substituting the values in formula:

=rate(12,80,-980,1000)

Rate or Yield to Maturity = 8.27%

Computation of Stock Price three Years from Today using PV Function in Excel:

=-pv(rate,nper,pmt,fv)

Here,
PV = Stock Price or Present Value = ?

Rate = 8.27%

Nper = 12-3 = 9 years

PMT = $1,000*80% = $80

FV = $1,000

Substituting the values in formula:

=-pv(8.27%,9,80,1000)

PV or Stock Price or Present Value = $983.32

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