Question

Q14- Suppose a​ seven-year, $1,000 bond with an 8.4% coupon rate and semiannual coupons is trading with a yield to maturity of 6.52%.

a. Is this bond currently trading at a​ discount, at​ par, or at a​ premium? Explain.

b. If the yield to maturity of the bond rises to 7.32%

​(APR with semiannual​ compounding), what price will the bond trade​ for?

If the yield to maturity of the bond rises to

7.32 %

​(APR with semiannual​ compounding), what price will the bond trade​ for?

The new price of the bond is $

Answer 1

Bond Par Value = $1,000

Coupon Rate = 8.4% semi-annually

YTM = 6.52%

Time Period = 7 years

a.

Calculating Bond Present Value,

Using TVM Calculation,

PV = [FV = 1000, PMT = 42, T = 14, I = 0.0652/2]

PV = $1,104.33

So, Bond is trading at premium to par value because coupon rate > YTM of Bond.

b.

If YTM = 7.32%

Calculating Bond Present Value,

Using TVM Calculation,

PV = [FV = 1000, PMT = 42, T = 14, I = 0.0732/2]

PV = $1,058.34

So, if YTM = 7.32%, Bond Present Value = $1058.34

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