Question

You bought at $1,000 bond at par (face value) that paid nominal interest at the rate of 10%, payable semiannually, and held it for 10 years. You then sold it at a price that resulted in a yield of 8% nominal interest compounded semiannually on your capital. What was the selling price?

Answer 1

Semiannual return = 1,000 * (10% / 2) = $50

Semiannual interest rate = 8% / 2 = 4%

n = 2 * 10 years = 20

Selling price = A(F/A, i, n) + P(F/P, i, n)

                     = 50(F/A, 4%, 20) + 1,000(F/P, 4%, 20)

                     = 50(29.778) + 1,000(2.191)

                     = 1,488.9 + 2,191

                     = $3,679.9

Thus, the selling price of the bond was $3,679.9.