Question

One year ago Dell sold 10 year $1000 par value semi annual coupon bonds at a...

One year ago Dell sold 10 year $1000 par value semi annual coupon bonds at a price of $950.00 per bond. Market rate was 9 percent at the time. Today the market rate is 9.5 percent, therefore the bonds are currently selling:

a. at a discount

b. at a premium

c. at par

d. below market price

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Homework Answers

Answer #1

At the time of purchase

Maturity value of bond (FV) = $1000

No of annual coupon payments pending till maturity (N) = 10

Price of bond (PV) = -$950

Yield to maturity of bond (Y) = 9% p.a.

Amount of coupon (PMT) = ??

Using financial calculator or PMT function in excel,

Amount of coupon (PMT) = 82.21

Therefore coupon rate for bond = 82.21 /1000 = 8.22%

Current market rate for bond = 9.50%

Since the market rate is more than coupon on bond, bond must be trading at discount.

Therefore option (a) is correct

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