Question

osina purchased a 15-year bond at par value when it was initially issued. The 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:

Answer 1

the current market price of the bond is:

PV of face value = $1,000 / (1 + 7.5%)¹³ = $390.56

PV of coupon payments = $70 x 8.12584 (PV annuity factor, 7.5%, 13 periods) = $568.81

market value = $959.37

Since the coupon rate is lower than the market rate, the bond will sell at a discount. Therefore, Osina should expect to lose money if she decides to sell her bond, it would classify as a long term capital loss.