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A bond your company issued has par of $1000 and matures in 6 years. It pays...

A bond your company issued has par of $1000 and matures in 6 years. It pays annual coupons of $40 each. Annual interest rates are now 3%.1. What is the value of the bond?2. Premium bond or discount bond?

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Answer #1

1. We can use financial calculator for calculation of value of the bond with below key strokes:

N = maturity = 6; I/Y = market interest rate = 3%; PMT = annual coupons = $40; FV = par value = $1,000 > CPT = compute > PV = value of the bond = $1,054.17

calculator will show PV as negative value because it's a cash outflow.

the value of the bond is $1,054.17.

2. It's a Premium bond because value of the bond $1,054.17 is higher than its par value of $1,000.

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