A 10%, five-year corporate bond issue with a par value of $1,000pays coupon on a...

A 10%, five-year corporate bond issue with a par value of $1,000 pays coupon on a semi-annual basis. The market discount rate at the time of the issue was 12% and has remained unchanged. Which of the following facts is most likely correct regarding the bond issue? A. The bond is priced at par. B. The bond is selling at a price below par. C. The bond offers an excessive coupon rate.

Expert Solution

Price of Bond = PV of CFs rom it.

If coupon Rate > Disc Rate, Bond will trade at premium,

If coupon Rate = Disc Rate, Bond will trade at par,

If coupon Rate < Disc Rate, Bond will trade at discount,

here Coupon Rate is 10%, DIsc Rate is 12%. Hence it will trade below par ( Discount ).

OPtion B is correct.

Price of Bond:

Period	Cash Flow	PVF/ PVAF @6 %	Disc CF
1 - 10	$ 50.00	7.3601	$ 368.00
10	$ 1,000.00	0.5584	$ 558.39
Bond Price			$ 926.40

As Coupon Payments are paid periodically with regular intervals, PVAF is used.
Maturity Value is single payment. Hence PVF is used.

Periodic Cash Flow = Annual Coupon Amount / No. times coupon paid in a year
Disc Rate Used = Disc rate per anum / No. of times coupon paid in a Year

What is PVAF & PVF ???
PVAF = Sum [ PVF(r%, n) ]
PVF = 1 / ( 1 + r)^n
Where r is int rate per Anum
Where n is No. of Years

How to Calculate PVAF using Excel ???
+PV(Rate,NPER,-1)
Rate = Disc rate
Nper = No. of Periods

jeff jeffy answered 2 years ago

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