Question

You are faced with two bonds ABC and XYZ that are viewed by investors as having the same risk. If ABC has a 10% coupon rate, 10 years to maturity, pays coupon semi-annually and is traded at par. XYZ has 10 years to maturity, pays coupon semi-annually and is traded at a discount. The coupon rate for XYZ bond should be:

		Could be higher or lower, there is not enough information to decide.
		Higher than 10%
		Equal to 10%
		Lower than 10%

How much should you be prepared to pay for a $1,000 10-year bond with an annual coupon of 6% and a yield to maturity of 7.5%?

		$411.84
		$985.00
		$897.04
		$1,000.00

Answer 1

I have answered the question below

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Answer:

1)

We have been told that Bond XYZ is trading at discount which means the coupon rate of the bond must be lower than ytm of the bond.

Since, we cannot get exace value of YTM it would be difficult to say that coupon rate will be lower than certain number.

Example :

If ytm = 10%, Coupon rate would be lower than 10%

If ytm = 15%, Coupon Rate would be lower than 15%.

Hnece (could be higher or lower, there is not enough information to decide) is correct.

2)

Using excel function PV

N = 10

YTM = 7.5%

FV = 1000

=> =PV(7.5%,10,-60,-1000)

= 897.04