# Bond Valuation Question

Thanatos0320
Posts:

**578**✭✭✭
I know a few of you do accounting and finance work. I'm hoping you'll be able to help me with a question I came across while studying. My mind has gone completely blank. I messaged my professor 2 days ago and he still hasn't replied.

Bond X is noncallable and has 20 years to maturity, a 9% annual coupon, and a $1000 par value. Your required return on bond X is 10% and if you buy it you plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 8.5%. How much should you be willing to pay for bond X today? (Hint: You will need to know how much the bond will be worth at the end of 5 years.)

Bond X is noncallable and has 20 years to maturity, a 9% annual coupon, and a $1000 par value. Your required return on bond X is 10% and if you buy it you plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 8.5%. How much should you be willing to pay for bond X today? (Hint: You will need to know how much the bond will be worth at the end of 5 years.)

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## Comments

2,529✭✭✭8,960✭✭✭578✭✭✭4,601✭✭✭✭✭8,960✭✭✭8,960✭✭✭578✭✭✭8,960✭✭✭4,601✭✭✭✭✭578✭✭✭4,559✭✭✭✭✭4,601✭✭✭✭✭It's all Greek to me, dude! :^)

578✭✭✭Rd=the market rate of interest on the bond. It's the discount rate use to calculate the present value of cash flows, which is also the bond's price.

N=the number of years before the bond matures. N declines over time after the bond has been issued; So a bond that had a maturity of 20 years when it was issued will have N=19 after 1 year, N=18 after 2 years and so forth.

INT=dollars of interest paid each year=coupon rate x par value. 1000 x .09=$90. If the payment had been semi annual then the payment would have been $45 every month.

M=the par, or maturity, value of the bond=1000. This amount must be paid at maturity.

I didn't completely follow the formula. Because i'm going to sell the bond in 5 years I made N=5 rather than 20 and instead of using the interest rate of 8.5% i used 10% because that's the required return I need. So with the 10% it'll show the most I'll have to pay. Anymore than 10% then the price of the bond will decrease. If you have a finance calculator then you can make N=5, I/Y=10, PMT=90, FV=100, and solve for PV. Here is my work.

4,601✭✭✭✭✭2,524✭0✭578✭✭✭2,524✭578✭✭✭1,308✭✭✭The Series 7 test is a CAKEWALK compared to the CFA test. Trust me, I've been in the industry for 20 years and the highest I ever got was the Series 6 and 65. CFAs are like Ph.D.s in comparison. Never took the 7 precisely because of the math. Never been a broker or advisor, just took them to increase my knowledge of investment marketing.

Bonds always confused the hell out of me and still do. That's why I buy only stocks. You always know where you stand with a stock--buy high, sell low, if you're the average investor. If you stock pays dividends it's pretty easy to calculate your yield. Bonds, on the other hand, can drive you nuts. If I ever wanted to buy a bond I'd just find the one offering the highest coupon rate selling below par (face value) and hold it to maturity.

578✭✭✭1,308✭✭✭The CFA designation is a great thing to have, because the material is so deep and technical that if you pass it you can pass just about any other NASD test. And CFAs have many more opportunities open to them other than being brokers or advisers. Many of them become fund analysts, stock analysts, and nearly every fund manager is a CFA these days. Having it is kind of proof that you can "talk the investment walk."

578✭✭✭1,308✭✭✭My advice: Take as much time as you need to study and learn. I've known people who were in the industry for many years and some took more than a year or more to study for CFA 1. Most people need 2-3 years to pass the two parts.