Question

BA Corp is issuing a 5 year bond with a coupon rate of 8 percent. The interest rate for similar bonds is currently 6 percent. Assuming annual payments, what price would you pay for the bond? Is it trading at a premium or a discount? Round your answer to 2 decimal places.

Answer 1

K = N

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

k=1

K =5

Bond Price =∑ [(8*1000/100)/(1 + 6/100)^k]     +   1000/(1 + 6/100)^5

k=1

Bond Price = 1084.25

Price is more than par value therefore it is trading at a premium