Fixed income instrument

chandniwadhwani92
Finance Junkie
Posts: 166
Joined: Mon Oct 06, 2014 7:36 am

Fixed income instrument

Postby chandniwadhwani92 » Thu Dec 18, 2014 2:46 pm

Today an investor purchases a $1,000 face value, 10%, 20-year, semi-annual bond at a discount for $900. He wants to sell the bond in 6 years when he estimates the yields will be 9%. What is the estimate of the future price?

A) $1,152.

B) $946.

C) $1,079.





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Click for Answer and Explanation


In 6 years, there will be 14 years (20 − 6), or 14 × 2 = 28 semi-annual periods remaining of the bond's life So, N = (20 − 6)(2) = 28; PMT = (1,000 × 0.10) / 2 = 50; I/Y = 9/2 = 4.5; FV = 1,000; CPT → PV = 1,079.

Note: Calculate the PV (we are interested in the PV 6 years from now), not the FV.
My question
Why did they calculated PV NOT FV

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Fixed income instrument

Postby edupristine » Fri Dec 19, 2014 10:20 am

Hi Chandani please solve it in this way-

Investor wants to sell bond after 6 years and he is expecting the yield will be 9%. So we have information already given about bond, N=20, Coupon= 10% semi-annual , FV= 1000, PV =900.
So, the idea is very clear that investor want to sell the bond after 6 years and he is expecting Yield = 9% at that time.
Put the values on calculator = FV=1000(Amt will receive after 20 years), N= 14*2 = 28, Yield =9%/2 = 4.5%, PMT= 50(i.e 10% of 1000 by 2) Now calculate PV =1078.7144.

We will not calculate FV because it will remain same till maturity date.


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