Question

Consider the following coupon bond: Coupon Rate 4.5% The bond has 22 years to maturity and pays coupons semiannually. The yield on comparable bonds is 5\%. Assume that the Face Value of the bond is 1,000. Which of the following is true:

a)This bond is a good buy if it selts at $1000
b)This bond is a good buy if it sells at $933.74
c)This bond is a good buy if it sells at $954.6
d)This bond is a good buy if it sells at $1033.74
e)none of these

Answer 1

To determine if a coupon bond is a good buy, compare its yield to maturity with the market yield. The bond is a good buy if its YTM is greater than the market yield. Without exact YTM calculations, options b) and c) could potentially be good buys as they are priced below face value.

Step-by-step explanation:

When assessing whether a coupon bond is a good buy, one must compare the bond's yield to maturity (YTM) with the current market yield. If the bond's YTM is higher than the market yield, the bond is usually considered a good buy because it offers a better return compared to other similar investments.

For a coupon bond with a coupon rate of 4.5%, a maturity of 22 years, and semiannual payments, a price lower than its face value indicates that its YTM would be higher than 5%. Given that the market yield is 5%, options b) and c) provide prices below the face value of $1,000, which could make the bond's YTM higher than the market yield, thus potentially being good buys. Nevertheless, without the exact calculations, we can't definitively conclude the YTM and ascertain the best option.