Question

Bond A has the following features:

         Face value = $1,000,       

Coupon Rate = 8%,       

Maturity = 8 years, Yearly coupons

         The market interest rate is 5.13%

If interest rates remain at 5.13%, what is the percentage capital gain or loss on bond A if you sell the bond in year 1?

State your answer to 2 decimal places (e.g., 3.56, 0.29)

If there is a capital loss make sure to include a negative sign in your answer (e.g., -0.23)

Can you show how to put in financial calculator

Answer 1

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 5.13%

And n is the no of Compounding periods 8 years

Coupon 8%

=

= 1184.52

Value after a year

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 5.13%

And n is the no of Compounding periods 7 years

Coupon 8%

=

= 1165.29

Capital Gain = 1165.29 - 1184.52 = -19.23