Question

A bond with exactly 10 years until maturity paid its semiannual coupon yesterday. The annual coupon rate is 8.00% and the bond price today is $1,050 . Suppose that the yield-to-maturity remains constant. Immediately after receiving the coupon in 6 months find the capital gain or loss that the bond will generate

Answer 1

The bond will generate a capital gain of $50.

Step-by-step explanation:

The capital gain or loss that the bond will generate immediately after receiving the coupon in 6 months can be calculated by determining the change in the bond's price. In this case, the bond is priced at $1,050. To calculate the capital gain or loss, we need to compare this price to the bond's face value, which is $1,000.

If the bond's price is higher than the face value, it would result in a capital gain. If the bond's price is lower than the face value, it would result in a capital loss. In this case, the bond's price is higher, so there would be a capital gain. The amount of capital gain can be calculated by subtracting the face value from the bond's price: $1,050 - $1,000 = $50.