Question

Tidewater finshing has a 7percent bond, which a face value of 1,000 and semiannual coupon. The bonds will be repaid in 8 years and will be sold at par. Given this, which one of the following statement is correct

A. if market interest rates will decline to 3% this bond will sell at premium

B.there is a total of 8 payments at 70 dollars each

C. the bond is worth less today than when it was issued

D. the bonds will initially sell for $1150 each

E. the final payment will be in the amount of % 1070

Answer 1

A. YTM is the discount rate. The bond sells at par if the YTM = coupon rate. Coupon rate is 7% If the discount rate is 3% then the sum of the discounted cash flows will be higher than the par value. So if market interest rates will decline to 3% this bond will sell at premium. Therefore this option is correct

B.The compounding is semi annual so there will be 8 x 2 = 16 payments of 7% x 1000/0 = 35 each. So this option is incorrect.

C. The bond is generally issued at par and even now it is selling for par so the bond is not worth less today than when it was issued. So this option is incorrect.

D. The bond initially sells for par value, which is 1000 so this option is incorrect

E.The final payment will be 1000 +35 = 1035 so this option is incorrect.