Question

Assume that Dell Corp. and Hammmer Mill Inc. both have bonds outstanding with 6 years left to maturity, both have a coupon rate of 13%, and both have a par of $1,000. Assume that the yield to maturity on the Dell Corp. bond is 15% and the yield to maturity on the Hammmer Mill Inc. bond is 15%. Which of the following is true?

a. they will both sell for $1,000

b. they will both sell for the same price, but each will sell for less than $1,000

c. they will both sell for the same price, but each will sell for more than $1,000

d. the Dell Corp. bond will sell for more than the Hammer Mill Inc. bond

e. the Dell Corp. bond will sell for less than the Hammer Mill Inc. bond

I believe the correct answer for this question is (B). The selling price according to my calculation is $924.31, which is less than the par value.

Answer 1

When YTM > coupon rate, bond will trade at discount

Here, both bonds have same maturity, same coupon and having same YTM

so both will trade at same price and less than 1000 as YTM > coupon rate

there is no need of calculation but still i have calculated price and attached it

correct answer : b. they will both sell for the same price, but each will sell for less than $1,000

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