Question

You are selling a 30-year coupon bond with a par value of $10,000 and a coupon

rate of 8% that has 8 years remaining until it matures. If current interest rates are 7%,

a. (5 points) Calculate the price of your bond on the secondary market

b. (8 points) Calculate your total return. Did you experience a capital gain or loss?

Answer 1

Value of Bond  =

Where r is the discounting rate of a compounding period i.e. 7%

And n is the no of Compounding periods 8 years

Coupon 8%

=

= 10597.13

Value of 30 year Bond =

Where r is the discounting rate of a compounding period i.e. 7%

And n is the no of Compounding periods 30 years

Coupon 8%

=

= 11240.90

Capital Loss

11240.90 - 10597.13 = 643.77