On the day it was issued, Aaron bought a 30-year, $1,000 strip bond at a market rate of 6% compounded semi-annually. Four years later he sold it to Zevon at the market rate of 7% compounded semi-annually. What was Aaron's profit or loss?
A) ($6.91) Loss
B) ($2.58) Loss
C) $0.00
D) $2.58 Profit
E) $6.91 Profit

Question

Quizplus · Accepted Answer

Aaron's profit or loss is calculated by finding the present value of the bond when he bought it and when he sold it. Initially, the bond's present value is calculated using a 6% semi-annual rate for 60 periods (30 years), and when sold, using a 7% semi-annual rate for 52 periods (26 years remaining). The difference in these values results in a loss of $2.58.

On the Day It Was Issued, Aaron Bought a 30-Year