Question

IBM issues an 11% annual coupon rate bond that matures in 16 years. The face value is $1000. The required rate of return on bonds of similar risk and maturity is 9%.

1. Is this IBM bond selling at a premium, at par or at a discount and explain why?

2. What is the price of this bond and show how?

3. Coupon payments are made monthly. What is the price of THIS bond and show how you got your answer?

EXCEL WILL DO

Answer 1

Part 1:

If Coupon rate > YTM, Bond will sold at premium

If Coupon Rate = YTM, Bond will sold at Par

If coupon Rate < YTM, Bond will trade at Discount

As Coupon rate (11%) > YTM(9%), Bond will be sold at Premium

Part 2:

Price of Bond = PV of CFs from it.

Year	CF	PVF @9%	Disc CF
1	$    110.00	0.9174	$    100.92
2	$    110.00	0.8417	$      92.58
3	$    110.00	0.7722	$      84.94
4	$    110.00	0.7084	$      77.93
5	$    110.00	0.6499	$      71.49
6	$    110.00	0.5963	$      65.59
7	$    110.00	0.5470	$      60.17
8	$    110.00	0.5019	$      55.21
9	$    110.00	0.4604	$      50.65
10	$    110.00	0.4224	$      46.47
11	$    110.00	0.3875	$      42.63
12	$    110.00	0.3555	$      39.11
13	$    110.00	0.3262	$      35.88
14	$    110.00	0.2992	$      32.92
15	$    110.00	0.2745	$      30.20
16	$    110.00	0.2519	$      27.71
16	$ 1,000.00	0.2519	$    251.87
Price of Bond			$1,166.25

Part C:

Period	CF	PVF @0.75%	Disc CF
1-180	$        9.17	101.5728	$    931.08
180	$ 1,000.00	0.2382	$    238.20
Price of Bond			$ 1,169.29