A ten year bond has a coupon rate of 7% and a yield to maturity of...

A ten year bond has a coupon rate of 7% and a yield to maturity of 9%, will you be willing to pay $1100 for this bond. Please explain.

Solutions

Expert Solution

No, because this bond is over-priced at $1,100.

Relationship between YTM, Coupon rate and Bond Value:

YTM >Coupon rate; then Bond value would be less than Par value of Bond

YTM = Coupon rate; then Bond value would be equals to Par value of Bond

YTM < Coupon rate; then Bond value would be greater than Par value of Bond

In given case,

Coupon rate = 7%

YTM = 9%

Par value of Bond = $1,000

YTM is greater than coupon rate of given Bond thus its value would be less than $1,000 ( par value).

This Bond is over-priced in market and recommended to buy.

Numerical calculation:

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Fair price of Bond is $871.65

jeff jeffy answered 1 year ago

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