Consider the following zero-coupon yields on default free
securities:
A 4 year default free security with a face value of $1000 and an
annual coupon rate of 5.25% will trade:
Group of answer choices
at a premium.
at par.
at a discount.
There is insufficient information provided to answer this question.
Homework Answers
a) face value = F= 1000
coupon rate = 5.25%
coupon payment = C = 52.5
time period = n = 4 years
YTM = 5%
since coupon rate > YTM, we can directly say that bond is trading at premium. But I can also show it with the proof by calculating price below
using bond price formula,
p = C1/(1+YTM)1 + C2/(1+YTM)2 + C3/(1+YTM)3 + (C4+F)/(1+YTM)4
= 52.5/(1.05)1 + 52.5/(1.05)2 + 52.5/(1.05)3 + 1052.5/(1.05)4
= 50 + 47.62 + 45.35 + 865.89
= 1008.86
since price > face value, the bond is trading at premium
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Consider the following zero-coupon yields on default free
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