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1 vote
An investor buys a corporate bond for 60 with 20 years to

maturity. If selling the bond for 75 in 7 years, what is the gain
or loss?

User Bassxzero
by
8.3k points

1 Answer

2 votes

Final answer:

The investor has a gain of $15 from buying the corporate bond at $60 and selling it at $75 after 7 years. This transaction shows how interest rate changes can affect bond prices and the importance of market timing for investors.

Step-by-step explanation:

An investor who buys a corporate bond for $60 and sells it for $75 after 7 years experiences a financial gain. The gain or loss on the investment is calculated by subtracting the purchase price from the selling price. In this case, the calculation would be $75 (selling price) - $60 (purchase price), which equals a gain of $15. This gain represents an increase in value from the initial investment.

By understanding how bonds work, it's evident that changes in interest rates affect the bond's value. Typically, when interest rates rise, bonds issued at lower rates become less valuable, hence they sell for less than their face value. Conversely, falling interest rates result in bonds issued at higher rates selling for more than face value, indicating that timing and market conditions are significant factors for bond investors. This concept is vital when considering whether to buy or sell bonds in different interest rate environments.

User Pickypg
by
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