Carrying Value of Bonds

In reading #55 we are calculating carrying value of a bond.

I understand we are taking the future value of the bond at a future year, while adding the coupon/reinvestment income.

Example:

6% coupon, 3 year annual pay bond, bond purchased with YTM of 5, sold at end of year 2 with YTM of 5

Price at sale (at end of year 2, YTM = 5%)

N = 1, IY = 5, FV = 1000, PMT = 60, CPT PV = -1009.52

Why do we only use N = 1 instead of N = 2 for this calculation? If we are seeking the price at sale at end of year 2, isn’t that two periods?

Moving on in the chapter we are looking at a similar example.

Consider a three year 6% bond purchased @ par by an investor with a one year investment horizon. If ytm increases from 6% to 7% after purchase and the bond is sold after one year, the rate of return can be calculated as follows:

Bond price just after 1st coupon has been paid with YTM = 7%

N = 2, IY = 7, FV = 1000, PMT = 60, cpt PV --> -981.92

Why is N = 2 when are we looking at the bond price just after 1st coupon was paid out? Shouldn’t this be N = 1?

The Kaplan book did not indicate in this chapter so far that they are using BGN mode but to me that is what seems necessary for these examples.

The bond price a the selling time is the PV of the remaining cash flows , i.e. only the remaining years until maturity are relevant. If the total lifetime is 3 years and you sell the bond after one year the buyer will still receive coupons for two years (N=2) plus the principal at maturity which is on what the selling price is based on. Draw a timeline and it should become clear.

Regards,

Oscar

Thanks Oscar!