So moving ahead to the next question, this is suppose we offer zero coupon bond.

So
first of all, you should be clear with what is a zero coupon bond.
If you aren't, then I would come that you watch the video for you in 7.2.
Now, this is a zero coupon bond, which is being offered at 2.45. So we have told
you the market price as well with the face value of 1000 and maturing in 20 years.
So let me just write down this information.
Let's make our data set.
So our bond is zero coupons. So there will be no coupon payments for compartments
will be zero since the coupon grade is zero.
The price of the bond, the bond value right now the price is 245. I have put a zero
over here because it's a price right now.
The face value is 1000 and it will mature in 20 years.
If the YTM on the bond is 8% so the YTM on the bond is 8%, what will be the price
of the bond after 2 years.
So they don't want the bond price right now. They've already told you that they
want the bond price 2 years later.
So let's make a time going for this for better understanding.
Okay, I have to go like this till 20.
I'm just going to go dot, dot, dot, dot, dot, and then just take it to 20.
So basically, this is your timeline over here from zero to 20. This is the total
bonds duration. I haven't made all of them because it would have been too long.
So they have given you the bond price right now.
They have told you that the bond price right now is 245 but they don't want the
price for right now. They want the price that will be two years later.
So let's put the values in our bond valuation formula and see what happens.
Because this is a zero coupon bond, there will be no coupon payment. So your bond
valuation formula is.
Now over here, since your coupon payments are zero, you do not have any payment
over here. It's a zero coupon bond, but you will only get the bar value back at the
maturity time.
This means this over here is zero. Now, if this is multiplying by this, this means
that this whole thing will become zero, and you're only left with this much of the
formula.
So this is your formula in case you are dealing with a zero coupon bond. Your bond
valuation formula will be used to only this much.
Once a bond matures 20 years you'll get a bar value of 1000. So your base value is
1000. Your interest rate is 8%.
But what should be your end? Should your end be 20? Or should it be something else?
You should think about this for a moment.
The end represents the remaining life of the bond.
So now if you think about it, you want the bond price at two years. So if somebody
is purchasing this bond at the end of the second year, his coupon payment will
start from here.
So what is the remaining life of the bond for somebody who is purchasing the bond
at year two, it's going to be 18 years. Your end is going to be 18 over here.
The complete maturity of the bond is 20 years. But if you had purchased the bond
right now, if you wanted to know the price right now, then you would have used an
end of 20 because end represents the remaining life of the bond.
But you want the end price two year later. So two years later, the remaining life
of the bond is going to be 18 years.
If somebody is like, you know, somebody is going to live for 20 years and you take
two years out of their life. So they are left with 18 years of their life. So if
you solve this, your answer will come to 50.25.
So this bond is again a discount bond because it is trading for below the par
value. So two years later, the price will be 250.25.
Similarly, if you want to calculate the bond price 19 years later, 19 years later,
if you want to calculate the bond price and the remaining life of the bond will
only be one.
In that case, you simply have to change end to one. You can find the bond price at
any given year using this way.