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The AAA bond rating represents the current market interest rate for the bonds which has
credit rating of AAA is 5%. The coupon rate of the bond is 5%.
Let us assume the number of years to maturity is 1year and face value to be $100:
Interest = Face value * Coupon rate
Using the equation
Price of bond = Interest/(1+Yield to maturity)1 + Face value/(1+Yield to maturity)1
Let us increase the time to maturity to 3 years:
In this case, one has to use PVIFA table to determine the value @5% for 3 years or using the
PVIFA @3% for 5 years =1 - (1.05)3/0.05
Price of bond = Interest * PVIFA @5% for 3 years + Face value/(1+Yield to maturity)3
= $5 * 2.7232+$100/(1+0.05)3
In this case the bond is selling at parPlease let me know if you need any clarification. I'm always happy to answer your questions.
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