(Bond valuation) Doisneau 16-year bonds have an annual coupon interest of 8 percent, make interest payments on a semiannual basis, and have a $1,000 par value. If the bonds are trading with a market's required yield to maturity of 14 percent, are these premium or discount bonds? Explain your answer. What is the price of the bonds? a. If the bonds are trading with a yield to maturity of 14%, then (Select the best choice below.)
A. the bonds should be selling at a premium because the bond's coupon rate is greater than the yield to maturity of similar bonds.
B. the bonds should be selling at par because the bond's coupon rate is equal to the yield to maturity of similar bonds.
C. there is not enough information to judge the value of the bonds.
D. the bonds should be selling at a discount because the bond's coupon rate is less than the yield to maturity of similar bonds.
The answer is:
D. the bonds should be selling at a discount because the bond's coupon rate is less than the yield to maturity of similar bonds.
We will verify this calculating the price of teh bonds.
The formula for the price of a bond is
where
n=number of peiods
i= interest rate per period
r=coupon rate per period
In this case
Face Value=1000
i=14%/2=7%=0.07
r=8%/2=4%=0.04
n=16 x 2= 32
Therefore the price is
Since the price is less than the face value, then the bond is selling at a discount.
(Bond valuation) Doisneau 16-year bonds have an annual coupon interest of 8 percent, make interest payments...
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