Question

A 15 year bond was issued six years ago. It has a Face Value of $1000 and makes annual coupon payments of $42. If the current yield to maturity is 4.0% pa, will this bond sell at a premium, discount or at par today?

	a.	premium
	b.	not enough information provided to determine
	c.	at par
	d.	discount

Answer 1

option a

Coupon payment =$ 42

Coupon rate = coupon amoun/ face value * 100 = 42/100*100= 4.2%

If the coupon rate> discount rate[4.2%>4%] then people can get a return of discount rate only if initial investment is higher than par value i.e. bonds trade at a premium to par value.

IF the coupon rate ishad been less than 4 % i.e. less than the discount rate the price will be at a discount to the par value of the bond.

At coupon rate of 4% i.e. where discount rate = coupon rate, bond will trade at par.

Hence in the given case, bonds trade at a premium.