Question

Suppose a seven-year, $1,000 bond with a(n) 10.19% coupon rate and semiannual coupons is trading with a yield to maturity of 8.81%

a. Is this bond currently trading at a discount, at par, or at a premuim? Explain.
b. If the yield to maturity of the bond rises to 9.44% (APR with semiannual compounding), at what price will the bond trade?

Answer 1

The bond is currently trading at a premium. If the yield to maturity rises to 9.44%, the bond will trade at a price of $964.

Step-by-step explanation:

The bond is currently trading at a premium.

When the yield to maturity is lower than the coupon rate, the bond is trading at a premium. In this case, the yield to maturity is 8.81% which is lower than the coupon rate of 10.19%, indicating that the bond is trading at a premium.

If the yield to maturity rises to 9.44%, the bond will trade at a price of $964. This can be calculated by discounting the future cash flows of the bond using the new yield to maturity rate.