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Math Help - bond with 10 years left to maturity

  1. #1
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    bond with 10 years left to maturity

    This is a two part question, I understood the first part but now I am at a standstill. Here is the question: We are asked what is the price of the bond if the yield is to be 9% per annum compounded annually?
    Using the formula given: P = A(1+i)^n
    10,000 = A*(1+.09)^15
    We solve for A: 10,000/(1+.09)^15 = $2,745.38
    Now the question asks, when the bond has 10 years left to maturity, it is offered for sale at $3855.43. Estimate the yeild on the bond if it is then purchased and held to maturity. I took the equation 10,000/(1+.09)^5 = 6,499.313863 to see where the bond would be if there was ten years left, but I can't see how this helps me. Please take a look at this and let me know what the next step is.
    Thankx,
    Keith
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  2. #2
    Grand Panjandrum
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    Quote Originally Posted by kcsteven View Post
    This is a two part question, I understood the first part but now I am at a standstill. Here is the question: We are asked what is the price of the bond if the yield is to be 9% per annum compounded annually?
    Using the formula given: P = A(1+i)^n
    10,000 = A*(1+.09)^15
    We solve for A: 10,000/(1+.09)^15 = $2,745.38
    Now the question asks, when the bond has 10 years left to maturity, it is offered for sale at $3855.43. Estimate the yeild on the bond if it is then purchased and held to maturity. I took the equation 10,000/(1+.09)^5 = 6,499.313863 to see where the bond would be if there was ten years left, but I can't see how this helps me. Please take a look at this and let me know what the next step is.
    Thankx,
    Keith
    With 10 years left and a price of 3855.43, we would have a yeild y, where:

    10000 = 3855.43 *(1+y)^10,

    or:

    y = (10000/3855.43)^{1/10) - 1 ~= 0.099999

    or ~ 10%.

    RonL
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