A four-year corporate bond with a 7% coupon has a Z-spread of 200 bps. Assume a...

A four-year corporate bond with a 7% coupon has a Z-spread of 200 bps. Assume a flat yield curve with an interest rate for all maturities of 5% and annual compounding. The bond will most likely sell:

A. at a premium to par.

B. close to par.

C. at a discount to par.

D. unsure

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 is 7% and YTM is 5%. As Coupon Rate > YTM, Bond will trade at Premium.

Option A is correct.

jeff jeffy answered 2 years ago

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