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Currently, the Augusta National 5-year bonds are priced at par and the YTM is 4%. Economists...

  1. Currently, the Augusta National 5-year bonds are priced at par and the YTM is 4%. Economists estimate that there is a 30% chance that yields on similarly rated bonds will fall to 3%, a 30% chance that yields will rise to 5%, and a 40% yields will stay at the current level. Assuming annual coupon payments, what is the expected 'dirty' price of this bond immediately prior to coupon distribution? What would you pay for the bond today? Is the bond trading at a premium/discount? What would you pay for the bond today if the bond is callable at $1,020?
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Answer #1
Coupon 40
Tenure 5
Par value 1000
Expected yield
Chance Yield
30% 3.00%
40% 4.00%
30% 5.00%
Exp yield 4.00%
Price today 1000
Immediately prior to coupon payment i.e. 1 year from now
Price 1040 (Coupon payment is added to price)
Bond is trading at par but just before coupon payment, it is trading at premium
If callable in 5 years at 1020
Price 1016
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