Question

There is a 14 year 12% bond that we buy when the market rates are 8%. What shall we sell it at in 4 years, if the market rates drop to 10%? Also, what is the current market price? Please use formula

Answer 1

Assuming the face value to be $1000

Coupon payment = 0.12 * 1000 = 120

Number of periods = 14 - 4 = 10

Selling price in four years = Coupon *[ 1 - 1 / ( 1 + R)ⁿ] / R + FV / ( 1 + R)ⁿ

Selling price in four years = 120 * [ 1 - 1 / ( 1 + 0.1)¹⁰] / 0.1 + 1000 / ( 1 + 0.1)¹⁰

Selling price in four years = 120 * 6.144567 + 385.543289

Selling price in four years = $1,122.89

Coupon payment = 0.12 * 1000 = 120

Number of periods = 14 = 14

Current market price = Coupon *[ 1 - 1 / ( 1 + R)ⁿ] / R + FV / ( 1 + R)ⁿ

Current market price = 120 * [ 1 - 1 / ( 1 + 0.08)¹⁴] / 0.08 + 1000 / ( 1 + 0.08)¹⁴

Current market price = 120 * 8.244237 + 340.461041

Current market price = $1,329.77