a four-year corporate bond with a 5% coupon has a z-spread of 125 bps. Assume a...

a four-year corporate bond with a 5% coupon has a z-spread of 125 bps. Assume a flat yield curve with an interest rate for all maturities of 4% and annual compounding. The bond will most likely sell:

a) close to par

b) at a premium to par

c) at a discount to par

Expert Solution

Bond Price:
It refers to the sum of the present values of all likely coupon payments plus the present value of the par value at maturity. There is inverse relation between Bond price and YTM ( Discount rate ) and Direct relation between Cash flow ( Coupon/ maturity Value ) and bond Price.

Price of Bond = PV of CFs from it.

If Coupon Rate > YTM, Bond will trade at Premium

If Coupon Rate = YTM, Bond will trade at Par

If Coupon Rate < YTM, Bond will trade at discount

in the given case, Coupon Rate ( 5% )> YTM (4%). Hence Bond will trade at premium.

OPtion B is correct.

jeff jeffy answered 2 years ago

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