Which bond is will trade at discount? A. Stated coupon rate for this bond is 8...

Which bond is will trade at discount?

A. Stated coupon rate for this bond is 8 % and appropriate YTM is 7%

B. Stated coupon rate for this bond is 8 % and appropriate YTM is 8%

C. Stated coupon rate for this bond is 8 % and appropriate YTM is 9%

D. Stated coupon rate for this bond is 8 % and appropriate YTM is 6%

Please explain.

Solutions

Expert Solution

Correct Answer - C. Stated coupon rate for this bond is 8 % and appropriate YTM is 9%

Bonds are priced in 3 different ways i.e at par, at discount or at a premium.

When the interest rate (YTM) of the bond is equal to the coupon rate the bond is priced at par.

When the interest rate (YTM) of the bond is lower to the coupon rate the bond priced at premium.

When the interest rate (YTM) of the bond is higher to the coupon rate the bond priced at discount.

There is no need to calculate the price of the bonds just by looking at the coupon rates and YTM we can conclude option C is correct answer as the coupon rate of 8% is lower than the YTM of 9% thus the bond will trade at a discount.

For better understanding have calculated the price of the bonds using present value function in excel

The formula for the 1st one has been shown; it is the same formula for the others.

jeff jeffy answered 1 year ago

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