Question

Rosina purchased one 15-year bond at par value when it was initially issued. This bond has a coupon rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality of bond is 7.5 percent, then Rosina should expect: the bond issuer to increase the amount of all future interest payments. the yield to maturity to remain constant due to the fixed coupon rate. to realize a capital loss if she sold the bond at today's market price. today's market price to exceed the face value of the bond. the current yield today to be less than 7 percent.

Answer 1

When interest rates rise, bond prices decrease, resulting in a potential capital loss for bondholders. The yield to maturity is higher than the coupon rate when the market rate is higher than the coupon rate. Bond prices are inversely related to interest rates.

Step-by-step explanation:

When interest rates rise, bonds previously issued at lower interest rates will sell for less than face value. Conversely, when interest rates fall, bonds previously issued at higher interest rates will sell for more than face value.

In this case, the bond was initially issued at a coupon rate of 7%, which is lower than the current market rate of 7.5%. Therefore, if Rosina were to sell the bond at today's market price, she would realize a capital loss because the market price would be lower than the face value of the bond.

As for the yield to maturity, it is calculated based on the bond's current price and the future cash flows it is expected to generate. Since the market rate is higher than the bond's coupon rate, the bond's price would be lower than the face value and, consequently, the yield to maturity would be higher than the coupon rate.

Answer 2

to realize a capital loss if she sold the bond at today's market price.

Step-by-step explanation:

Given that

NPER is 13

RATE is 7.5%

PMT is 7% of $1,000

Future value be $1,000

We need to find out the present value

So,

The current price of the bond is:

=PV(7.5%,13,7%*1000,1000)

=$959.37

Now if she wants to sell the bond now, so the value should be less than the face value due to which there should be the capital loss