Suppose a seven-year, $1,000 bond with a 11.17% coupon rate and semiannual coupo

Question

Suppose a seven-year, $1,000 bond with a 11.17% coupon rate and semiannual coupons is trading with a yield to maturity of 10.04%

1. Is the bond currently trading:

a. at a discount because the coupon rate is greater than the yeild to maturity?

b. at par because the coupon rate is equal to the yield to maturity?

c. at a premium because the coupon rate is greater than the yield to maturity?

d. at a premium because the yeild to maturity is greater than the coupon rate.  

2. If the yield to maturity of the bond rises to 10.67% (APR with semiannual compounding), at what price will the bond trade?

Explanation / Answer

1. The bond is trading at a premium since the coupon rate is greater than the yield to maturity

2.

N = 14

FV = 1000

PMT = 111.7/2

rate = 10.67%/2

use PV funciton in Excel

price of the bond = 1,024.23

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