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I wanted to learn about bonds so I bought a rather risky one (Chesapeake Ene Corp SR NT 6.62% 08/15/2020 / 165167CF2). Since purchase, the price of the bond has risen 72.81% for a gain of $257.02 as of this post. I originally planned on holding the bond until maturity to get the full bond experience but now I'm unsure.

The gain on the bond is now approaching a value greater than the remaining coupon payments, 6.62% annually x 4 years until maturity = $264.80 in coupon payments.

I feel like I'm missing something here, but it seems like a no-brainer to me considering the risk of the bond. If a bond's gain is greater than the remaining coupon payments does it mark a time to sell?

  • 6.62% of what? The bond pays 6.62% for the original loan, but what did you pay for it? – littleadv Apr 29 '16 at 12:33
  • @littleadv I thought the 6.62% coupon was based on the par value, $1000, no matter the current value of the bond? I paid $352 for the bond. – Daniel Storm Apr 29 '16 at 12:35
  • When did you buy the bond? – DJohnM Apr 29 '16 at 16:22
  • @DJohnM 03/15/2016 – Daniel Storm Apr 29 '16 at 16:23
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You paid $352 for a $1000 bond, i.e.: you got $648 discount. So when the maturity occurs, you will get the $264 coupon payments and the $648 redemption value on top of what you actually paid - total $912. If your capital gain exceeds that $912 - definitely sell, ASAP.

Obviously there's a risk that they will default, which judging by the discount you got someone thought is quite significant. That's up to you if you want to take that risk. You were already aware that it is risky when you bought it, it seems.

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    Thank you for clearing up what I assumed I was missing. I was under the assumption that at the time of maturity I would receive the current market value of the bond and not the full value. I'm aware of the risks associated and that's why I chose this bond for the learning experience. Thank you again. – Daniel Storm Apr 29 '16 at 13:09

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