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Math Help - Capital Gain or Loss of selling a bond

  1. #1
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    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?
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  2. #2
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    Quote Originally Posted by danville View Post
    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.
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  3. #3
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    Quote Originally Posted by Wilmer View Post
    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.
    ================================================== =========

    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
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  4. #4
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    Quote Originally Posted by danville View Post
    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!!
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