A $1,000 par value bond was issued 25 years ago at a 7 percent coupon rate. It

Question:

A $1,000 par value bond was issued 25 years ago at a 7 percent coupon rate. It currently has 10 years remaining to maturity. Interest rates on similar debt obligations are now 12 percent. Use Appendix B and Appendix D.

(a) Compute the current price of the bond using an assumption of semiannual payments. (Round "PV Factor" to 3 decimal places, intermediate and final answer to 2 decimal places. Omit the "$" sign in your response.)

(b) If Mr. Robinson initially bought the bond at par value, what is his percentage loss (or gain)? (Round "PV Factor" to 3 decimal places, intermediate and final answer to 2 decimal places. Omit the "%" sign in your response.)

(c) Now assume Mrs. Pinson buys the bond at its current market value and holds it to maturity, what will her percentage return be? (Round your intermediate calculations and final answer to 2 decimal places. Omit the "%" sign in your response.)

(d) Although the same dollar amounts are involved in part b and c, why the percentage gain is larger than the percentage loss.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...