Problem 2: Consider a $1000 bond with a coupon rate of 7.5% and annual coupons. The...
Problem 2: Consider a $1000 bond with a coupon rate of 7.5% and annual coupons. The par value is $1,000, and the bond has 10 years to maturity. The yield to maturity is 10%. For each question, show your work/calculations.
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What is the present value of coupons?
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What is the present value of face value (i.e. par value)?
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What is the value of the bond?
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Is it a premium or discount bond? Value of bond > par value, premium bond
Homework Answers
| a | Annual Interest Amount | $ 75.00 |
| ($1000*7.5%) | ||
| b | PV Annuity Factor for (10 Years,10%) | 6.144567 |
| c | Present Value Of coupons (a*b) | $ 460.84 |
| d | Redemption Value | $ 1,000.00 |
| e | PV Factor Of (10 Years,10%) | 0.38554 |
| g | Present Value Of face value (d*e) | $ 385.54 |
| f | Value Of The Bond (c+g) | $ 846.39 |
Since bond value is less than par value , the bond is issued at discount.
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