Chapter 16: A $1,000 par value bond was issued five years ago at a coupon rate o

Question

Chapter 16: A $1,000 par value bond was issued five years ago at a coupon rate of 8 percent. It currently has 7 years remaining to maturity. Interest rates on similar debt obligations are now 10 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. Compute the current price of the bond using an assumption of semiannual payments. (Do not round intermediate calculations and round your answer to 2 decimal places.)

Current Bond Price____
  

b. If Mr. Robinson initially bought the bond at par value, what is his percentage capital gain or loss? (Ignore any interest income received. Do not round intermediate calculations and input the amount as a positive percent rounded to 2 decimal places.)
Percentage____%

  
c. Now assume Mrs. Pinson buys the bond at its current market value and holds it to maturity, what will be her percentage capital gain or loss? (Ignore any interest income received. Do not round intermediate calculations and input the amount as a positive percent rounded to 2 decimal places.)
  

Percentage___%

Explanation / Answer

Par 1000 Maturity 7 Coupon 8% Interest rate 10% (i) Price of bond = PV of cash flows discounted at Yield Price = 1000 x 8%% x 6/12 x PVAF(10/2%,7x2) + 1000 x PVIF (10/2%,7x2) Price = 40 x 9.8986 + 1000 x 0.5051 Price = 395.95 + 505.07 Price = 901.0136 (ii) current price 901.0136 Purchase price 1000 Loss= -98.9864 % loss = -9.899% (ii) Maturity value 1000 Purchase price 901.0136 Profit = 98.98641 % Capital gain 9.899% Please provide feedback…. Thanks in advance…. :-)

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