Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Suppose a seven-year, $1,000 bond with an 8
Suppose a seven-year, $1,000 bond with an 8.2% coupon rate and semiannual coupons is trading with a yield to maturity of 6.32%
a) Is this bond currently trading at a discount, at par, or at a premium? Explain (Select the best choice below )
A) Because the yield to maturity is greater than the coupon rate, the bond is trading at a premium.
B) Because the yield to maturity is less than the coupon rate, the bond is trading at a premium.
C) Because the yield to maturity is greater than the coupon rate, the bond is trading at par.
D) Because the yield to maturity is less than the coupon rate, the bond is trading at a discount.
b) If the yield to maturity of the band rises to 7.38% (APR with semiannual compounding), what price will the bond trade for?
Expert Solution
a) We can calculate the price of bond by using the following formula in excel:-
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of bond
Rate = 6.32%/2 = 3.16% (semiannual)
Nper = 7*2 = 14 periods (semiannual)
Pmt = Coupon payment = $1,000*8.2%/2 = $41
FV = $1,000
Substituting the values in formula:
= -pv(3.16%,14,41,1000)
= $1,105.03
Correct option is B)
The bond is trading at premium because the yield to maturity is less than the coupon rate. (6.32%<8.2%)
b) We can calculate the price of bond by using the following formula in excel:-
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of bond
Rate = 7.38%/2 = 3.69% (semiannual)
Nper = 7*2 = 14 periods (semiannual)
Pmt = Coupon payment = $1,000*8.2%/2 = $41
FV = $1,000
Substituting the values in formula:
= -pv(3.69%,14,41,1000)
= $1,044.21
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
