Question

Your company issued a 10 percent coupon rate bond with the face value of $1,000. The bond pays interest rate semiannually, and the bond has 20-year to maturity, the market required interest rate on the bond is 8 percent. (2 points)

Is the bond selling at par, at discount or at premium? Explain. Write down the formula and find the price of this bond?

Answer 1

Since the interest is paid semiannually the bond interest rate per period is 5% (= 5% ÷ 2), the market interest rate is 4% (= 8% ÷ 2) and number of time periods are 40 (= 2 × 20). Hence, the price of the bond is calculated as the present value of all future cash flows as shown below:

semiannual coupon payment = 5% x 1000 = $ 50

Price of Bond = 50/1.04 + ...... + (50 + 1000)/1.0440 Price of Bond = $ 1197.93

It is selling at a premium (Price > face value)