1)An investor purchases a nine-year, 7% annual coupon payment bond at a price equal to par value. After the bond is purchased and before the first coupon is received, interest rates increase to 8%. The investor sells the bond after five years. Assume that interest rates remain unchanged at 8% over the five-year holding period.
- The capital gain/loss per 100 of par value resulting from the sale of the bond at the end of the five-year holding period is closest to a:
- loss of 8.45.
- loss of 3.31.
- gain of 2.75.
Hi,
Ans should be B reason being if interest rate rises after the purchase of bond then price would fall.
Purchase price = 100
PMT = 7
N= 5
I/Y = 8%
PV =96.01
Loss = 3.99 close to ans B
In candidate resources,
N=4
& CPT PV 96.69
ANS B 100 – 96.69 = 3.31
My question is that why it is subtracted from 100 , and not from carrying value