Bond price calculation question (if interest rates remain stable)

[emilioalzamora1]

Hi All,

just a quick question on how to tackle the following question - can anyone please help/advise how to solve for 981.56 as the price at which it could be sold?

If you purchase a 3-year, 9% coupon bond for $950, how much could it be sold for 2 years
later if interest rates have remained stable? ​

Many thanks!

 

[David Harper CFA FRM]

hi @emilioalzamora1

1. first you retrieve the yield (I am using a TI BA II+): N = 3, PV = -950, PMT = 90, FV = 1000 and CPT I/Y = 11.04776
2. Then here's a tip: don't re-enter any values except the revised maturity. The yield of 11.05% is already in memory. All you need is N = 1 (under these assumptions, the only change is N reduces from 3 to 1), then CPT PV = 981.56. I hope that helps! (notice this question assumes annual coupons, it should say "annual pay")

Here is a more advanced follow-up question for pondering (sorry, occupational hazard ):

• The question assumes that yield (ie, yield to maturity) remains stable over the two years. But what if, instead, an upward-sloping term structure remains stable (i.e., Tuckman's unchanged term structure) over the two years; then how will the price compare to $981.56? (higher/lower/same/not enough info)

 

[emilioalzamora1]

Hi David, many thanks for your prompt reply; I did it myself in the meantime and just wanted to post the answer but you got there first!

It is quite similar to this question (for those who want to practice a bit):

By how much will a bond increase in price over the next year if it currently sells for 925, has 5-y until maturity and an annual coupon rate of 7%.

N=5, PV= -925, PMT= 70, FV=1000 > CPT i/Y = 8.92 and then 2nd step: N=4, PMT=70, i/Y = 8.92, FV= 1000 > CPT PV = 937,55. The difference (937,55 - 925) is then the price increase: 12,55.