A $1000 par value bond was issued 25 years ago at a 7 percent coupon rate. It cu
ID: 2678935 • Letter: A
Question
A $1000 par value bond was issued 25 years ago at a 7 percent coupon rate. It currently has 10 years remaining to maturity. Interest rates on similar debt obligations are now 12 percent.a) compute the currrent price of the bond using an assumption of semiannual payments?
B)If Mr. Robinson initially bought the bond at par value, what is his percentage loss or gain?
C) Now assume Mrs. Pinson buys the bond at its current market value and holds it to maturity , what will her percentage return be?
D) Altough the same dollar amounts are involved in parts b and c, explain why the percentage gain is larger than the percentage loss.
Explanation / Answer
A $1000 par value bond was issued 25 years ago at a 7 percent coupon rate. It currently has 10 years remaining to maturity. Interest rates on similar debt obligations are now 12 percent.
a) compute the currrent price of the bond using an assumption of semiannual payments?
The bond price is $717.49
B)If Mr. Robinson initially bought the bond at par value, what is his percentage loss or gain?
Current price $717.49
Purchase price 1,000
decrease-$282.51
= -28.25%
Loss of 28.25%=decrease-$282.51
C) Now assume Mrs. Pinson buys the bond at its current market value and holds it to maturity , what will her percentage return be?
Profit = 39.38%
D) Altough the same dollar amounts are involved in parts b and c, explain why the percentage gain is larger than the percentage loss.
The percentage gain is more than the percentage loss, because in b,
the denominator equals $1,000, while in c above, the amount of cash paid is smaller ($717.49), and the amount of $282.51 represents a smaller percentage of the par value.
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