This Study Resource Was: (Question)
This Study Resource Was: (Question)
A $1,000 par value bond was issued 20 years ago at a 9 percent coupon rate. It currently
has five years remaining to maturity. Interest rates on similar debt obligations are now 10
percent.
a. Compute the current 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. Although the same dollar amounts are involved in part b and c, explain why the
percentage gain is larger than the percentage loss.
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[Answer]
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a. Present value of interest payments
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Dollar loss/Investment = $38.51/$1,000 = 3.85%
d. The percentage gain is larger than the percentage loss because the investment is
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smaller ($961.49 versus $1,000). The gain/loss is the same ($38.51).
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