Question

Suppose, three years ago, you purchased a 15-year coupon bond paying 5% interest annually with a face value of $1000. It is now three years later and you just received an interest payment yesterday (the bond matures in exactly twelve years). You look in the paper and the yield on comparable debt is 6%. If you bought it at Par value, did you have a capital gain or loss? Also, if the yield decreased to 4.5%, would you have a capital gain or loss, or could you tell?

Group of answer choices

Capital Gain; Capital Gain                                                      

Capital Gain; Capital Loss

Capital Loss; Capital Loss

none of them

Capital Loss; Capital Gain

Answer 1

Option E - Capital Loss; Capital Gain

When the yeild rate of a bond increases, the price of the bond decreases.; When Yeild rate increases to 6%, the value of bond decreases to $915.05; hence a Capital Loss occurs

When the yield rate of a bond decreases, the price of the bond increases; When Yeild rate decreases to 4.50%, the value of bond decreases to $1,045.00; hence a Capital Gain occurs

Present Value of Bond @ 6% Interest rate
Year	Interest Amount	PVF @ 6%	PVAF
1	$50.00	0.943	$47.15
2	$50.00	0.890	$44.50
3	$50.00	0.840	$42.00
4	$50.00	0.792	$39.60
5	$50.00	0.747	$37.35
6	$50.00	0.705	$35.25
7	$50.00	0.665	$33.25
8	$50.00	0.627	$31.35
9	$50.00	0.592	$29.60
10	$50.00	0.558	$27.90
11	$50.00	0.526	$26.30
12	$50.00	0.496	$24.80
12	$1,000.00	0.496	$496.00
Present Value of Bond			$915.05

Present Value of Bond @ 4.50% Interest rate
Year	Interest Amount	PVF @ 4.5%	PVAF
1	$50.00	0.957	$47.85
2	$50.00	0.916	$45.80
3	$50.00	0.877	$43.85
4	$50.00	0.839	$41.95
5	$50.00	0.803	$40.15
6	$50.00	0.768	$38.40
7	$50.00	0.735	$36.75
8	$50.00	0.703	$35.15
9	$50.00	0.673	$33.65
10	$50.00	0.644	$32.20
11	$50.00	0.616	$30.80
12	$50.00	0.589	$29.45
12	$1,000.00	0.589	$589.00
Present Value of Bond			$1,045.00