Question

.Jackson purchases a 10-year 1000 par bond with 8% annual coupons for L to yield 9% annually. Six years later, after the coupon, he sells the bond for G when annual yields are 7%. Find L – G without excel.

Answer 1

Given about Bond purchased by Jackson,

Face value = $1000

coupon rate = 8% annually

coupon payment = 8% of 1000 = $80

YTM at the time of purchase = 9%

years to maturity = 10 years

To solve for price, use following values on financial calculator:

FV = 1000

PMT = 80

N = 10

I/Y = 9

Solve for PV, we get PV = -935.82

So, purchase price of bond L = $935.82

after 6 years, bond was sold when YTM is 7%

To solve for price, use following values on financial calculator:

FV = 1000

PMT = 80

N = 4

I/Y = 7

Solve for PV, we get PV = -1033.87

Selling price of the bond G = $1033.87

So, L-G = 935.82 - 1033.87 = $-98.05