The bond has a facevalue of 40 and maturity of 20 years. It produces 0 coupon payments during the first 6 years but pays coupons of 2 annually during the last 14 years. The discount rate is 7%.

The formula looks like this;

$$ P=\frac{CPN}{y}[1-\frac{1}{(1+y)^{N_1}}]+\frac{FV}{(1+y)^{N_2}} $$

Since the coupon only pays during the last 14 years, I tried $N_1=14, N_2=20, CPN=2,y=0.07, FV=40$ in the formula above. But that gave me an answer of $P=27.83$, but the answer should be $P=21.99$.

  • $\begingroup$ The formula does not look right. The formula is for a bond that pays CPN during the first $N_1$ years, then 0 during the last $N_2-N_1$ years, which is the reverse order than what you want. $\endgroup$ – Alex C Jan 17 at 20:58

You question is saying that you have 14 payments coming starting in 6 years. This implies that the formula is as you have it, but replace both $N_1$ and $N_2$ with $N_2-N_1$ and discount that whole cashflow from T=6 to today. Accordingly, this is the equation you're looking for.

$$P=(1+y)^{-{N_1}} * [\frac{CPN}{y}(1-\frac{1}{(1+y)^{N_2-N_1}})+\frac{FV}{(1+y)^{N_2-N_1}}]$$


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