Bond question from "Buffett's 3 Favorite Books"

I'm just beginning the book. I have a question regarding bonds.

Here's the paragraph in question:

"“I bought these 30-year bonds for $ 1,000 each only 3 years ago. These bonds pay 6% interest every year. Right now, everyone is scared about the economy, and I can sell each bond for $ 1,432. If people were going to buy a bond today, the best rate they could get is 3.5%."

My question is the math and how he arrived at exactly $1,432.00. I understand the basis of why it's worth more now, but just not how we arrived at that exact figure. Can someone please the work?

Thank you!

Comments

  • You take the $60 yearly interest payments and the $1000 principal payment and discount them at 3.5% per year based on when they will be paid out to get the 1432. They make calculators that will do it for you.
  • $60/1.035=$57.97=first payment discounted at 3.5%

    $60/(1.035)^2=$56.01=second payment discounted at 3.5% for two years.

    $60/(1.035)^3=$54.12=third payment discounted at 3.5% for three years.

    Do this all the way to thirty years and add in the $1000 principal discounted for thirty years.

    $1000/(1.035)^30=$356.28

    Add them all together to get
    $57.97+$56.01+$54.12+......+$356.28=

    Current bond value
  • Thanks Buckmaster!
  • You're welcome. I just re-read the thread and the bond is a 27 year bond because it was held for three years. You should adjust the $1000 payment to a 27 year payment and forget the last three interest payments (years 28-30) because they have already been received. In real life you should discount partial years because you are less likely to buy a bond with 27 years left than something like 26.548 years left.
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