Question

There is a 30 year bond, which pays 6% per annum at the time that required rates are10%. We buy with the intention of selling it in 4 years at which time the required rate is 6%. How much do we sell it in 4 years, and how much do we buy it now? Include the equation you will use as step 1.

Answer 1

We will buy it at =  

Where r is the discounting rate of a compounding period i.e. 10%

And n is the no of Compounding periods 30 years

Coupon 6%

=

= 622.92

We will sell it at =  

Where r is the discounting rate of a compounding period i.e. 6%

And n is the no of Compounding periods 24 years

Coupon 6%

=

= 1000