Question

A 30 year, 5% coupon bond issued by a corporation (paying semi annual coupons) has a face value of $1000, with a market interest rate of 12% Is the bond selling at more or less than face value? What is the price of the bond? A 30 year 5% coupon issued by the United States government has a market interest rate of only 6% instead of 12%. Why might the market rate of interest on these 2 bonds be so different?

Answer 1

a) Bond selling at less than face value because Coupon is less than market interest rate

Use Excel function to calculate price of bond

PV(0.12/2,2*30,-0.05*1000/2,-1000,0)

= $434.35

c) First bond is the Corporation bond which has largest risk because of default risk but second bond is the US Government bond which has very low risk. So, YTM is more in Corporation bond