Consider a 3 year coupon bond with a face value of $1000 and a coupon rate of 10%. Mr. Smith purchased this bond at par (i.e., he paid Pt=$1000) when it was newly issued. The market interest rate at the time the coupon bond was issued was 10%. One year from the time of the bond's issue, he decides to sell the bond, i.e., the holding period is one year. At that time, the market interest rate has risen to 15%.
1. Set up the equation you will need to find the price that Mr. Smith will obtain when he sells the bond, Pt+1. You do not have to solve for the actual price he gets.