Question

In: Finance

A 14-year annual coupon bond was issued nine years ago at par. Since then the bond’s...

A 14-year annual coupon bond was issued nine years ago at par. Since then the bond’s yield to maturity (YTM) has increased from 8% to 11%. Which of the following statements is true about the current market price of the bond?

Group of answer choices
Insufficient information
The bond is selling at a premium
The bond is selling at a discount
The bond is selling at par

Solutions

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.

9 Years ago, it was sold at par, That means Coupon Rate and YTM are same at that time .

Hence coupon Rate is 8%

Now,

Coupon Rate = 8% ( It wont change )

YTM = 11%

As coupon Rate < YTM, Bond will trade at Discount.

Option 3 is correct

jeff jeffy answered 2 years ago
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