Question

B. There is a 30 year bond, which pays 6% per annum at the time that required rates are10%. We buy with the intention of selling it in 4 years at which time the required rate is 6%. How much do we sell it in 4 years, and how much do we buy it now?

Answer 1

Use PV function to find the prices now and after 4 years.

=PV(rate,nper,pmt,fv,type)

a. If you want to buy now

rate=10%

nper=30 years

pmt=coupon*face value=6%*1000=60

fv=face value=1000

=PV(10%,30,60,1000,0)=$622.92

if you wants to buy now=$622.92

b. If you want to sell after 4 years

rate=6%

nper=30-4=26 years

pmt=60

fv=1000

=PV(6%,26,60,1000,0)=$1000

The price at which you sell after 4 years=$1000