A $1,000 par value bond was issued five years ago at a coupon rate of 8 percent.

Question

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: ________________ (loss or gain)

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 _______________ (loss or gain)

Explanation / Answer

Appendix Table B & D are not provided in question answer may differ in points
Part (A)
Current Bond Price = $ 40 pvif ( 5%, 14 years ) + $1000 PVIAF ( 5%, 14 years )
= $901.01

Part B
Percentage Capital Gain & Loss =  ($1000 - $901.01)/ $1000

= 9.9 %
Part C

Percentage Capital Gain & Loss = ($1000 - $901.01) / $ 901.01
= 10.99 %

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