Question

1. i) A 5 year semiannual coupon bond with a face value of $1000 trades at $868. The market-determined discount rate is 7%. What is the coupon rate? Answer in percent and round to two decimal places.

ii) If a bond always trades at a discount…

a) it is trading above par.

B) it is a coupon bond.

c) it is a zero coupon bond.

D) it is trading at par.

iii) A zero coupon bond with a face value of $1000 that matures in 8 years sells today for $627. What is the yield to maturity? (Use annual compounding.) Enter in percent to two decimal places.

Answer 1

1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =5x2

868 =∑ [(Coupon rate*1000/200)/(1 + 7/200)^k]     +   1000/(1 + 7/200)^5x2

k=1

Coupon rate% = 3.83

2

it is a zero coupon bond

3

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =8

627 =∑ [(0*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^8

k=1

YTM% = 6.01