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    A 20-year bond with a 9% coupon rate and 5 years remaining was issued. Interest rates are now 10%. a) The current price of the bond is $961.49 b) If bought at par, Mr. Robinson's loss is 3.85% c) If Mrs. Pinson buys at the current price, her return will be 4.01% d) The percentage gain is larger because the investment amount is smaller for Mrs. Pinson.

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    A 20-year bond with a 9% coupon rate and 5 years remaining was issued. Interest rates are now 10%. a) The current price of the bond is $961.49 b) If bought at par, Mr. Robinson's loss is 3.85% c) If Mrs. Pinson buys at the current price, her return will be 4.01% d) The percentage gain is larger because the investment amount is smaller for Mrs. Pinson.

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    18 views2 pages

    This Study Resource Was: (Question)

    Uploaded by

    Mir Salman Ajab
    A 20-year bond with a 9% coupon rate and 5 years remaining was issued. Interest rates are now 10%. a) The current price of the bond is $961.49 b) If bought at par, Mr. Robinson's loss is 3.85% c) If Mrs. Pinson buys at the current price, her return will be 4.01% d) The percentage gain is larger because the investment amount is smaller for Mrs. Pinson.

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    of 2

    [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.

    m
    er as
    co
    [Answer]

    eH w
    o.
    rs e Mr. Robinson – Mrs. Pinson
    ou urc
    a. Present value of interest payments
    o

    PVA = A × PVIFA (n = 10*, i = 5.00%) Appendix D


    aC s

    PVA = 45 × 7.722 = $347.49


    vi y re

    Present value of principal payment at maturity


    PV = FV × PVIF (n = 10*, i = 5.00%)
    ed d
    ar stu

    PV = $1,000 × .614 = $614.00 Appendix B

    Total present value


    is
    Th

    Present value of interest payments $347.49


    Present value of payment at maturity 614.00
    Total present value or price of the bond $961.49
    sh

    b. Purchase price $1,000.00


    Current value 961.49
    Dollar loss $ 38.51

    This study source was downloaded by 100000821410841 from CourseHero.com on 10-09-2021 12:14:05 GMT -05:00

    https://www.coursehero.com/file/15184805/25/
    Dollar loss/Investment = $38.51/$1,000 = 3.85%

    c. Maturity value $1,000.00


    Purchase price 961.49
    Dollar gain $ 38.51

    Dollar gain/Investment = $38.51/$961.49 = 4.01%

    d. The percentage gain is larger than the percentage loss because the investment is

    m
    er as
    smaller ($961.49 versus $1,000). The gain/loss is the same ($38.51).

    co
    eH w
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    rs e
    ou urc
    o
    aC s
    vi y re
    ed d
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    Th
    sh

    This study source was downloaded by 100000821410841 from CourseHero.com on 10-09-2021 12:14:05 GMT -05:00

    https://www.coursehero.com/file/15184805/25/
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