You are selling a 20 year bond purchased 2 years ago with a par value of $1,000.

Question

You are selling a 20 year bond purchased 2 years ago with a par value of $1,000. Coupon rate is 8% with annual interest payments. Currently bonds of this risk are yielding 9%. At what price will that bond be sold (assuming annual compounding) and what will be the amount of gain/loss over original purchase price? What would be the gain/loss if the bond had a 4 year maturity instead of 20 (with all other characteristics the same)? What type of risk had you assumed?

DATA:
Purchased--2 years ago; Bond--20; Par value--1,000; Coupon rate--8%; Yield--9%.

Explanation / Answer

Using a TI BAII calculator with N=18 PMT= 80 FV=1000 and I/Y= 9% we get a PV of 912.44 so there would be a loss of 87.56. Changing N to 2 we get 982.41 so the loss becomes 17.59. The type of risk assumed is interest rate risk.

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