Question

Morin Company’s bonds mature in 3 years, have a par value of $1,000, and make an annual coupon interest payment of $95. The discount rate is 9.5 on these bonds. What is the bond’s value?

Answer 1

When the coupon rate of the bond equals its discount rate (i.e. Yield to Maturity), the bond will be trading at par value.

• Annual coupon = $95
• Annual coupon rate = $95 / $1,000 = 9.5% (coupon is always paid on par value)
• Discount rate (or YTM) = 9.5%
• i.e. coupon rate = discount rate. Therefore, bond value = par value = $1,000
• Check:
  • 
  • Price of a bond is the present value of all future cash flows from it discounted at a required rate of return. This required rate of return is the YTM.
  • YTM is the yield the bond-holder earns when the bond is held until its maturity.
  • The cash flows from a bond are periodic coupon payments and the redemption of face value on maturity.