Question

Bond A has a par valye of $5,000, a coupon rate of 5% and a time to maturity of 10 years. The current interest rate of similar risk bonds is 4.5%. Calculate the current market price of the bond, ignoring brokerage fees and any bid/ask spreads. Will the bond be selling at premium, or at par, or at discount?

Answer 1

Par Value = $5,000

Coupon rate = 5% or 0.05

Coupon payment = $5,000 * 0.05 = $250

Market interest rate = 4.5%

Calculate the curent market price of bond -

Current market price = Present value of Coupon payment + Present value of Par Value

Current market price = $250(P/A, 4.5%, 10) + $5,000(P/F, 4.5%, 10)

Current market price = ($250 * 7.9127) + ($5,000 * 0.6439)

Current market price = 1,978.17 + 3,219.50 = $5,197.67

The current market price of bond is $5,197.67

The current market price of bond is greater than the par value of bond.

So,

The bond is selling at a premium.