Question

You buy a bond with the following features: 9 years to maturity, face value of $1000, coupon rate of 3% (annual coupons) and yield to maturity of 1.4%. Just after you purchase the bond, the yield to maturity rises to 5%. What is the capital gain or loss on your bond?

Answer 1

Here we need to calculate the initial price of the bond and the price of the bond once the yield to maturity rises to 5% and find the difference between the two.

Calculating initial price of the bond:

No of years (N) = 9 years

Face value =$1000

PMT = 3%*1000 = $30

YTM = 1.4%

Using PV function in excel to calculate Price

Price =-PV(1.4%,9,30,1000) = $1,134.42

Calculating price of the bond once YTM rises:

No of years (N) = 9 years

Face value =$1000

PMT = 3%*1000 = $30

YTM = 5%

Using PV function in excel to calculate Price

Price =-PV(5%,9,30,1000) = $857.84

Therefore, capital loss on the bond = $1,134.42 - $857.84 = $276.58