Question

What is the price of an Empire bond that matures in 18 years, with an annual coupon rate of 11.0% paid semi-annually and a 7.0% yield to maturity? The bond’s par value is $1,000. Is this bond selling at a premium or discount? Why?

Answer #1

We will use the financial calculator to compute the answer

N = 36 ( converted into semi annual periods)

I/Y = 3.5% ( converted into semi annual rate)

PMT = $55 ( Coupon @ 11% and converted into semi annual payment)

FV = $1000

PV = $1405.81

The bond is selling at a premium because the coupon payment on Bond is 11% whereas the interest rate in the market is 7% which is lower than coupon rate. It means bond is paying more to the investors than elsewhere in the market.

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