show all work Mr. Bond is considering purchasing a bond with 10-year maturity and $1,000 face...

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Question

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Mr. Bond is considering purchasing a bond with 10-year maturity and $1,000 face value. The coupon interest rate is 8% and the

Answer 1

Answer #1

1.

Number of periods to maturity = n = 10 years

Yield to Maturity = r = 12%

Annual Coupon Payment P = 8%*1000 = $80

Face Value FV = $1000

Hence, PV = P/(1+r) + P/(1+r)2 + .... + P/(1+r)n + FV/(1+r)n

= P[1 - (1+r)-n]/r + FV/(1+r)n = 80(1 - 1.12-10)/0.12 + 1000/1.1210 = $773.99

2.

Number of periods to maturity = n = 5 years

Yield to Maturity = r = 10%

Annual Coupon Payment P = 12%*1000 = $120

Face Value FV = $1000

Hence, PV = P/(1+r) + P/(1+r)2 + .... + P/(1+r)n + FV/(1+r)n

= P[1 - (1+r)-n]/r + FV/(1+r)n = 120(1 - 1.10-5)/0.10 + 1000/1.105 = $1075.82

The price of the bond is greater than the face value. Hence, the bond is trading at a premium

Answer 2

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