Bond Problem

One year ago, an investor purchased a lO-year, $1,000 par value, 8% semiannual coupon bond with an 8% yield to maturity. Now, one year later, interest rates remain unchanged at 8%. If the investor sells the bond today (immediately after receiving the second coupon payment, and with no transaction costs) he will have a capital: A. gain of$80. B. loss of $80. C. gain of $0. D. gain of$160. I think the answer is A due to the interest payment gain with value of the bond unchanged since the interest rate remains at par. 1080 - 1000 = gain of 80. Not sure why the answer says it’s C.

It’s C because interest payments received are not capital gains. They want to know the change in price of the bond, considering interest rates have not moved the price of the bond stayed the same. so 0 gain

coupon are interest income. capital gain is the difference between how you paid for the bond and how much you sold it for. if you have noticed, it says the interest rates remained unchanged, therefore you bought at par and sold it at par and you made no capital gain.

The capital gain or loss is the amount by which asset’s selling price is greater (gain) or lower (loss) than the purchase price of the asset. Since the rates in the market remained the same, the asset would be sold for the same amount ($1,000) that it was bought. Hence, no capital gain or loss.

Got it! Thanks guys!

This is a really perfect example of how I would lose marks in the exam. I know that the capital gain is 0, but I would have answered A because thats just how I read the question. I really have to work on the whole “reading the actual question thats actually there”!!

Same thing here Bexter. I need to work that as well. Well lesson learned =)

Yeah but there’s an ambiguity here “gain of capital” of 80 would be correct but “capital gain” of 80 would not be correct? You can understand why people who have troubles with English have some troubles here.