Question

Doisneau 25​-year bonds have an annual coupon interest of 13 ​percent, make interest payments on a semiannual​ basis, and have a ​$1 comma 000 par value. If the bonds are trading with a​ market's required yield to maturity of 18 ​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 18​%, then The price of the bonds is

​$.

​ (Round to the nearest​ cent.)

Answer 1

a). the bond is trading at discount as the bond issuer is offering a lesser coupon rate, than the market's yield.

b). Bond's Market Value = PV of Coupon Payment + PV of Maturity Value

= [Periodic Coupon Payment * {(1 - (1 + r)^-n) / r}] + [Face Value / (1 + r)^n]

= [{(13%/2)*$1,000} * {(1 - (1 + 0.18/2)^-(25*2)) / (0.18/2)}] + [$1,000 / {1 + (0.18/2)}^(25*2)]

= [$65 * {0.9866 / 0.09}] + [$1,000 / 74.3575]

= [$65 * 10.9617] + $13.45

= $712.51 + $1.45 = $725.96