A $1,000 par value bond was issued five years ago at a coupon rate of 12 percent. It currently has 7 years remaining to maturity. Interest rates on similar debt obligations are now 14 percent. Use Appendix B andAppendix 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 (Click to select)LossGain %
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 (Click to select)LossGain %
d. Why is the percentage gain larger than the percentage loss when the same dollar amounts are involved in parts b and c?
The percentage gain is larger than the percentage loss because the investment is larger. The percentage gain is larger than the percentage loss because the investment is smaller.
| A $1,000 par value bond was issued five years ago at a coupon rate of 12 percent. It currently has 7 years remaining to maturity. Interest rates on similar debt obligations are now 14 percent. Use Appendix B andAppendix 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 | (Click to select)LossGain | % |
| 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 | (Click to select)LossGain | % |
| d. | Why is the percentage gain larger than the percentage loss when the same dollar amounts are involved in parts b and c? | ||||
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Related questions
Both Bond Bill and Bond Ted have 12 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 3 years to maturity, whereas Bond Ted has 20 years to maturity.
Requirement 1:
| If interest rates suddenly rise by 3 percent, what is the percentage change in the price of these bonds? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).) |
| Percentage change in price | |
| Bond Bill | % |
| Bond Ted | % |
| Requirement 2: |
| If rates were to suddenly fall by 3 percent instead, what would be the percentage change in the price of these bonds? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) |
| Percentage change in price | |
| Bond Bill | % |
| Bond Ted | % |
