Question

You invest in a bond that has a five year life and pays a coupon of 11% with a face value (principal) of $1000. Which if the following statements are true if you needed to get a 13% return?

a) You paid more than $1000 for it.

B) You paid less than $1000 for it

c) It sold to you at a premium

d) You paid $1000 for it.

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =5

Bond Price =∑ [(11*1000/100)/(1 + 13/100)^k]     +   1000/(1 + 13/100)^5

k=1

Bond Price = 929.66