Can coupon bonds experience capital gain and loss? Why?

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Expert Solution

Coupon Bond

It is a debt obligation that is essentially anonymous as there is no name printed on it. What is to be noted is that this coupon projects the semi-annual interest payment. Although they are rare they are deemed as quite a simple way through which the investor can earn interest.

As for the above question, yes coupon bonds experience capital gain or loss.

Suppose, party A issued the bond at $1500 with a fixed interest rate coupon. But the market fluctuations in the interest rate can increase or decrease the price of the coupon bond. Say, if the interest rate of A's bond is 3% but a new bond of the same type in the market has the interest rate of 4% then the investor will prefer to buy that 4% for $1500 then go for the low-rate bond.

So if you sell that coupon and end up earning a loss then that will be your capital loss. Whereas, the capital gain is the opposite of capital loss.

Rahul Sunny answered 3 months ago

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