Problem:
A $1000 par value bond was issued 20 years ago t a 9 percent coupon rate. It currently has 5 years remaining to maturity. Interest rates on similar debt obligations are now 10 percent.
Required:
Question: Compute the current price of the bond using an assumption of semiannual payments.
Question: If Mr. Robinson initially bought the bond at par value, what is his percent age loss (or gain)?
Question: Now assume Mrs. Pinson buys the bond at its current market value and holds it to maturity what will her percentage return be?
Question: Although the same dollar amounts are involved in part b and c, explain why the percentage gain is larger than the percentage loss.