Suppose you are considering investing in a Telus Corp. corporate bond with a $15,000 face value maturing on July 23, 2020. The bond's coupon or bond rate is 5.05 percent, and interest is paid semi-annually. The current required market rate or yield to market (YTM) for a bond of this type is 2.74 percent.
(a) Explain if and why this bond should sell at par, at a premium, or at a discount.
(b) Determine the purchase price or "clean price" for this bond if the purchase was made on July 23, 2014.
(c) Determine the cash price or "dirty price" for this bond if the purchase is instead made on September 28, 2014.
(a)This bond will sell at a premium.
Whenever a new bond is issued in the market it is always issued at par value, not at any premium or discount. A bond became premium/discount once it starts trading in the secondary market. A bond trading above its par value will be known as premium bond as it offers coupon rate higher than YTM and investor's demand for such a bond will high, which will increase the price of the bond.
If Coupon rate > YTM, the bond will sell over par value or at a premium.
If coupon rate = YTM, the bond will sell at par.
If coupon rate < YTM, the bond will sell below par value or at a discount.
(b)
Step1:- We will discount all the future value to 23rd July 2014.
Step 2:- We will not consider coupon payment received on 23rd July 2014 as this coupon is already received by the seller.
Step 3:- As the seller is selling the bond on one of the coupon dates, there would be no accrued interest.
Step 4: Dirty Price = Clean Price + Accrued Interest (Accrued interest = 0)
Dirty Price = Clean Price = 16905.11891 Answer
(c)
The price of the bond on 23rd July 2014 =16905.11891
The price of the bond on 28th Sept 2014 = 16991.32563
Dirty price = 16991.32563
Accrued Interest = 140.9791667 (Interest accrued between 28th Sept
2014 and 23rd July 2014)
Clean Price = 16850.34646
Suppose you are considering investing in a Telus Corp. corporate bond with a $15,000 face value...
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