Question

Your grandfather purchased a $1,000 face-value bond 10 years ago. When he purchased the bond, it had 30 years to maturity and a coupon rate of 9% paid annually. Now you want to sell the bond and read that the yield on similar bonds is 3.65%. What can you sell the bond for today?

Answer 1

The selling price of the bond is computed as shown below:

The coupon payment is computed as follows:

= 9% x $ 1,000

= $ 90

N will be as follows:

= 30 - 10

= 20

So, the price of the bond will be:

= $ 90 / 1.0365¹ + $ 90 / 1.0365² + $ 90 / 1.0365³ + $ 90 / 1.0365⁴ + $ 90 / 1.0365⁵ + $ 90 / 1.0365⁶ + $ 90 / 1.0365⁷ + $ 90 / 1.0365⁸ + $ 90 / 1.0365⁹ + $ 90 / 1.0365¹⁰ + $ 90 / 1.0365¹¹ + $ 90 / 1.0365¹² + $ 90 / 1.0365¹³ + $ 90 / 1.0365¹⁴ + $ 90 / 1.0365¹⁵ + $ 90 / 1.0365¹⁶ + $ 90 / 1.0365¹⁷ + $ 90 / 1.0365¹⁸ + $ 90 / 1.0365¹⁹ + $ 90 / 1.0365²⁰ + $ 1,000 / 1.0365²⁰

= $ 1,750.15 Approximately

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