Question

Please provide examples of the following:

6. Calculate gain or loss when selling an issued bond before its due date

7. Calculate the selling price of a bond:

a. The present value of interest payments plus

b. The present value of face value of the bond at maturity

Answer 1

Question - 6

A bond that pays 8% annual Interest was purchased 4 years ago for $ 1020. There are further 6 years to maturity. However due to general decline in the market interest, these bonds are trading at $ 1200. what is the gain or loss on sale of these bonds at very beginning of 5th year.

Gain on sale of bond = sale value - carring value of the bond = 1200 - 1012 = 188

Note (1) carrying value ( using straight line amortization of bond premium) = 1020 - 20 * 4years / 10 years = 1012

Note (2) annual interest earned @ 8% is a revenue gain, hence not to be considered as gain on account of sale.

Question - 7

Suppose 8% annual coupon bond of face value 1000 are to be issued by a company. Considering the risk class to which this company belongs, investors preffer 10% Yield to maturity. Terms of maturity is 5 Years. Determine the selling price of these bonds

a. Present value of Interest payments = 80 x [ 1 - (1.10)^-5 ] / 0.10 = 303.26

b. Present value of face value of the bond at maturity = 1000 / (1.10)⁵ = 620.92

Selling price = 303.26 + 620.92 = 924.18 .............. will the selling price of bonds to be issued.