Question

1. Assume Par value of $1,000 and semiannual coupon payments for all:

A bond has a coupon rate of 8.6% and 11 years until maturity. If the yield to maturity is 7.6%...

a) is the bond selling at a discount, premium or at face value?

b) what is the price of the bond?

c) if market rates rose (such that bonds of equal credit risk were now paying 8% (new YTM = 8%), would that make the price of the bond go up or down versus your answer above? Calculate new price.

d) if the bond had a call provision, which party generally benefits: bond issuers (corporations & gov’t entities) or bondholders?

Answer 1

Part A:

As coupon rate > YTM, Bond will be selling at Premium ( > Face Value)

Part B:

Price of a bond = PV of Cashflows from it.

Part C: if Int rate increases, Bond price will decrease ( Inverse relation etween YTM & Bond Price)

New Bond Price:

Part D:

Callable Bond, The issuer of Bond can call at any time before its maturity period.

Generally Issuer will call for, where the conditions are favourable to him.