Question
In: Finance
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 agoRelated Solutions
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