Question

a. The ABC company issued bonds with a face value of $1,000 each. The bonds carry an 8 percent coupon, pay interest semi-annually, and mature in 7 years. What is the current price of these bonds if the yield to maturity is 12 percent?





b. If the market price of the bond is $1,050, do you buy or sell the bond? Why?





c. What type of bond is this? Why?

Answer 1

a)	Par/Face value	1000
	Annual Coupon rate	0.08
	Annual coupon	80
	semi-annual coupon	40
	Present Value = Future value/[(1+(r/m))^mt]
	r is the interest rate that is 12%.
	m is the compounding period that is 2
	mt is the time period.
	price of the bond = sum of present values of future cash flows
	r/2	0.06
	mt	1	2	3	4	5	6	7	8	9	10	11	12	13	14
	future cash flow	40	40	40	40	40	40	40	40	40	40	40	40	40	1040
	present value	37.73585	35.59986	33.58477	31.68375	29.89033	28.19842	26.60228	25.09649	23.67594	22.33579	21.0715	19.87877	18.75356	459.993
	sum of present values	814.10
	The current price of these bonds is $814.10
	b. If the market price of the bond is $1,050, do you buy or sell the bond? Why?
b)	The actual value of these bonds is $814.10, so you should sell the bonds in the market for
	$1050 and make a profit of (1050 - 814.10) $235.9 per bond.
c)	This bond is a premium bond because the market price ($1050) is more than
	its face value ($1000).
	The current market price should be $814.10, however the bond is trading at a
	premium of $1050.