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Assume that it is May 15, 2020, and the Government of Canada has just issued bonds...

Assume that it is May 15, 2020, and the Government of Canada has just issued bonds with a May 2022 maturity, $300 par value, and a 5% (APR) coupon rate with semi-annual coupons. The first coupon payment will be paid on November 15, 2020. 1.Calculate the price of the bond if alternative investments with similar risk pay 4% per year (APR) return. 2. Was your bond sold at a premium, discount or at par? Explain why it was sold at a premium, discount or par.

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Answer #1

; C = 0.05x 30o = $15 4 = 0.04 ; n = 4 P = 300 (because there are 2 coupon payments per year) The formula for price of a bond

The bond is trading higher than its par value (i.e. $310.8897 > $300). hence it is trading at a premium.
The bond is trading at premium because it offers a coupon rate (5 per cent) which is higher than the prevailing interest rate (4 per cent).

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