# Thread: Capital Gain or Loss of selling a bond

1. ## Capital Gain or Loss of selling a bond

Pittston Company 7% coupon bonds pay interest semiannually. When you bought one of these bonds, it had 13 years to maturity, and the appropriate discount rate was 9% per year. After one year, the discount rate on such bonds is 8% per year because of the improved financial condition of the company. If you sell the bond today, what would be your capital gain or loss?
[Gain = $75.23] I am not sure where to even begin with the calculations for this problem. The ultimate answer is in parenthesis, but I have no idea how to get there. Any suggestions? 2. Originally Posted by danville Pittston Company 7% coupon bonds pay interest semiannually. When you bought one of these bonds, it had 13 years to maturity, and the appropriate discount rate was 9% per year. After one year, the discount rate on such bonds is 8% per year because of the improved financial condition of the company. If you sell the bond today, what would be your capital gain or loss? [Gain =$75.23]
Capital gain (or loss) is difference between selling and purchase price.

Purchase price was at 9% with 13 years (26 semiannual periods) to go: 848.533...
Selling price was at 8% with 12 years (24 semiannual periods) to go: 923.765...

Selling price - Purchase price = 923.765... - 848.533... = 75.23 (rounded) = capital gain

I'll let you do the calculations to get Purchase and Selling prices: I think you know how.

3. Originally Posted by Wilmer
Capital gain (or loss) is difference between selling and purchase price.

Purchase price was at 9% with 13 years (26 semiannual periods) to go: 848.533...
Selling price was at 8% with 12 years (24 semiannual periods) to go: 923.765...

Selling price - Purchase price = 923.765... - 848.533... = 75.23 (rounded) = capital gain

I'll let you do the calculations to get Purchase and Selling prices: I think you know how.
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I am not getting the same numbers for some reason.......

B = 35[1-(1+.09)-26] / .09 + 1000/1.0926
B = 347.51+ 106.39
B = 453.90

B = 35[1-(1+.08)-24] /.08 + 1,000/1.0824
B = 368.51 + 157.70
B = 526.21

526.21 – 453.9 = 72.31

4. Originally Posted by danville
B = 35[1-(1+.09)-26] / .09 + 1000/1.0926

B = 35[1-(1+.08)-24] /.08 + 1,000/1.0824
You are using the ANNUAL rates: you MUST use the semiannual rates: .045 and .04

Purchase = 35[1-(1+.045)^(-26)] / .045 + 1000/1.045^26
and
Selling = 35[1-(1+.04)^(-24)] /.04 + 1,000/1.04^24

PLUS you were told to use ^ in your equations: START NOW!!