Questions: Rosina 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: - today's market price to exceed the face value of the bond. - the bond issuer to increase the amount of all future interest payments. - the current yield today to be less than 7 percent - to realize a capital loss if she sold the bond at today's market price - the yield to maturity to remain constant due to the fixed coupon rate

Rosina 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: - today's market price to exceed the face value of the bond. - the bond issuer to increase the amount of all future interest payments. - the current yield today to be less than 7 percent - to realize a capital loss if she sold the bond at today's market price - the yield to maturity to remain constant due to the fixed coupon rate
Transcript text: Rosina 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: - today's market price to exceed the face value of the bond. - the bond issuer to increase the amount of all future interest payments. - the current yield today to be less than 7 percent - to realize a capital loss if she sold the bond at today's market price - the yield to maturity to remain constant due to the fixed coupon rate
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Solution

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The answer is the fourth one: to realize a capital loss if she sold the bond at today's market price.

Explanation for each option:

  1. Today's market price to exceed the face value of the bond:

    • Incorrect. When the market interest rate (7.5%) is higher than the bond's coupon rate (7%), the bond's price will fall below its face value. This is because investors can get a better return elsewhere, so the bond must be sold at a discount to be attractive.

  2. The bond issuer to increase the amount of all future interest payments:

    • Incorrect. The coupon payments are fixed at 7% of the face value and do not change with market interest rates. The issuer will continue to pay the same amount of interest as initially agreed.

  3. The current yield today to be less than 7 percent:

    • Incorrect. The current yield is calculated as the annual coupon payment divided by the current market price. Since the market price is below the face value (due to the higher market interest rate), the current yield will be higher than the coupon rate of 7%.

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

    • Correct. Since the bond's market price has fallen below its face value due to the increase in market interest rates, Rosina would sell the bond for less than what she paid for it (par value), resulting in a capital loss.

  5. The yield to maturity to remain constant due to the fixed coupon rate:

    • Incorrect. The yield to maturity (YTM) changes with the market price of the bond. Since the market interest rate has increased to 7.5%, the YTM will also adjust to reflect this new rate, which will be higher than the fixed coupon rate of 7%.

Summary: Rosina should expect to realize a capital loss if she sold the bond at today's market price because the current market rate for similar bonds is higher than the bond's coupon rate, causing the bond's market price to fall below its face value.

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