Question

Suppose a​ seven-year,

$1,000

bond with

a

7.5%

coupon rate and semiannual coupons is trading with a yield to maturity of

6.39%.

a. Is this bond currently trading at a​ discount, at​ par, or at a​ premium? Explain.

b. If the yield to maturity of the bond rises to

7.34%

​(APR with semiannual​ compounding), what price will the bond trade​ for?

a. Is this bond currently trading at a​ discount, at​ par, or at a​ premium? Explain.  ​(Select the best choice​ below.)

A.

Because the yield to maturity is greater than the coupon​ rate, the bond is trading at a premium.

B.

Because the yield to maturity is greater than the coupon​ rate, the bond is trading at par.

C.

Because the yield to maturity is less than the coupon​ rate, the bond is trading at a premium.

D.

Because the yield to maturity is less than the coupon​ rate, the bond is trading at a discount.

b. If the yield to maturity of the bond rises to

7.34%

​(APR with semiannual​ compounding), what price will the bond trade​ for?The new price of the bond is

​$nothing.

​ (Round to the nearest​ cent.)

Answer 1

Face/Par Value of bond = $1000

Semi-Annual Coupon Bond = $1000*7.5%*1/2

= $37.5

No of coupon payment(n) = 7 years*2 = 14

a). Ans- Option C. Because the yield to maturity is less than the coupon​ rate, the bond is trading at a premium.

The Bond's YTM is lower than the coupon rate and due to inverse relationhip that exist between YTM and trading price, when YTM is lower than coupon rate the Price is traded at premium (i.e, higher than face value)

b). Yield to maturity of the bond rises to 7.34% ​(APR with semiannual​ compounding)

Semi-annual YTM = 7.34%/2 = 3.67%

Calculating the Market price of Bond:-

Price = $404.888 + $603.749

New Price of Bond = $1008.64

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