Suppose that 4 years ago, the company invested $11,600 in a semiannual-pay bond with a 10-year...
Suppose that 4 years ago, the company invested $11,600 in a semiannual-pay bond with a 10-year maturity and a coupon rate of 8%. Since then, interest rates have increased and currently a comparable 6-year bond has a coupon rate of 10%.
Do you expect the bond the company bought, to be selling at a premium or at a discount? Why?
Homework Answers
The bond will sell at a discount as the coupon rate on the bond is lower than the comparable market return i.e. current yield on the Bond
Value of bond is equal to the present value of all remaining coupon payments and the principal amount
All these amounts are discounted at the existing yield on the bonds
and hence, the bond will trade at a discount
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