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.
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 parts b and c, explain why the percentage gain is larger than the percentage loss.