A $1000 face value bond was issued at par 20 years ago with 6% coupon paid semiannually. The bond now has seven years remaining to maturity and similar debt obligations are yielding 12%.
Compute the current price of the bond. Assumign that the bond is sold at its current price, what is the capital gain or loss from the original purchase? Now assume that the price of the bond returns to par, what is the percentage capital gain or loss for the new owner? Please explain why the percentage gain is different from the percentage loss.