Question

The following describes an AAA-rated Plain Vanilla bond with a coupon of 6% and a maturity of 10 years from today. Question 2a: At the end of year seven, what would be the value of the bond if interest rates on similar bonds are now 8%? Question 2b: Is this bond now trading at a premium, discount, or at par value?

Answer 1

a.Information provided:

Face value= future value= $1,000

Time= 10 years

Coupon rate= 6%

Coupon payment= 0.06*1,000= $60

Yield to maturity= 8%

The value 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= 60

I/Y= 8

N= 10

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

The value obtained is 865.80.

Therefore, the value of the bond is $865.80.

b.Since the value of the bond is less than the par value, the bond is trading at a discount.