# word problem

• Mar 13th 2007, 09:35 AM
kcsteven
word problem
I have a two part question, the first part I think is right, I would appreciate if you would look it over. The second part I am not sure about. Here goes:
A bond wioll pay \$10,000 when it come due in 15 years. what is the price of the bond if the yield is to be 9% per annum compounded annually?
I used the Equation P = A*(1+i) ^n and the equation is 10,000 = A(1+.09)^15. Solving for A:
A = \$2,745.38

The other part of the question asks:
When the bond has only 10 years left to maturity, it is offereed for sale at \$3855.43. I am asked to estimate the yield on the bond if it is then purchased and held to maturity.
Thank you for your help!
Keith
• Mar 14th 2007, 10:34 AM
ticbol
Quote:

Originally Posted by kcsteven
I have a two part question, the first part I think is right, I would appreciate if you would look it over. The second part I am not sure about. Here goes:
A bond wioll pay \$10,000 when it come due in 15 years. what is the price of the bond if the yield is to be 9% per annum compounded annually?
I used the Equation P = A*(1+i) ^n and the equation is 10,000 = A(1+.09)^15. Solving for A:
A = \$2,745.38

The other part of the question asks:
When the bond has only 10 years left to maturity, it is offereed for sale at \$3855.43. I am asked to estimate the yield on the bond if it is then purchased and held to maturity.
Thank you for your help!
Keith

I would answer it like this.

It is like you invest the \$3855.43 in 10 years, compounding annualy.

10,000 = 3855.43(1 +i)^10
(1+i)^10 = 10,000/3855.43 = 2.593744407
1 +i = (2.593744407)^(1/10) = 1.100000083
i = 1.1000 -1 = 0.10
Therefore, the yield would be 10 percent. ----------answer.