Capital Gain or Loss of selling a bond

Apr 2010
13
0
[FONT=&quot][/FONT][FONT=&quot]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?[/FONT][FONT=&quot][/FONT]
[FONT=&quot][Gain = $75.23[/FONT][FONT=&quot][/FONT][FONT=&quot]][/FONT]


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?
[FONT=&quot][/FONT][FONT=&quot][/FONT]
 
Dec 2007
3,184
558
Ottawa, Canada
[FONT=&quot][/FONT][FONT=&quot]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?[/FONT][FONT=&quot][/FONT]
[FONT=&quot][Gain = $75.23[/FONT][FONT=&quot][/FONT][FONT=&quot]][/FONT]
[FONT=&quot][/FONT][FONT=&quot][/FONT]
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.
 
Apr 2010
13
0
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.......

[FONT=&quot]B = 35[1-(1+.09)-26] / .09 + 1000/1.0926 [/FONT]
[FONT=&quot]B = 347.51+ 106.39[/FONT]
[FONT=&quot]B = 453.90[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]B = 35[1-(1+.08)-24] /.08 + 1,000/1.0824[/FONT]
[FONT=&quot]B = 368.51 + 157.70[/FONT]
[FONT=&quot]B = 526.21[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]526.21 – 453.9 = 72.31[/FONT]
 
Dec 2007
3,184
558
Ottawa, Canada
[FONT=&quot]B = 35[1-(1+.09)-26] / .09 + 1000/1.0926 [/FONT]

[FONT=&quot]B = 35[1-(1+.08)-24] /.08 + 1,000/1.0824 [/FONT]
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!!