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What is the price of an Empire bond that matures in 18 years, with an annual...

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?

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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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