Question

If a five-year, $1,000 bond with a 5% coupon rate is trading at a YTM of 5%, it is trading _____

	A.	at par
	B.	at a discount
	C.	cannot be determined
	D.	at a premium

Answer 1

Information provided:

Face value= future value= $1,000

Time= 5 years

Coupon rate= 5%

Coupon payment= 0.05*1,000= $50

Yield to maturity= 5%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 50

I/Y= 5

N= 5

Press the CPT key and PV to compute the present value.

The value obtained is 1,000.

Therefore, the price of the bond is $1,000.

The bond is trading at par since the price of the bond is the same as par value.

Hence, the answer is option a.