Question

Doisneau 16​-year bonds have an annual coupon interest of 9 ​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 16 ​percent, are these premium or discount​ bonds? Explain your answer. What is the price of the​ bonds?

Answer 1

discount bond.

Step-by-step explanation:

A premium bond is one whose price is above its par value, while a discount bond is one whose price is below its par value. Therefore, to find the answer, we need to find the price of the bond.

To find the price of the bond, we use the formula attached in this answer.

In the formula, YTM = Yield to Maturity, C = Value of the Coupon payment, P = par value of the bond, and n = number of periods till matirity.

We have this information.

YTM = 16%

P = 1,000

The number of periods n = 32 because it is a 16-year bond that pays a semiannual coupon, so 16*2 = 32

Finally, the coupon payment is 45 because the coupon rate is 9%, and the coupon is paid semiannually, so the formula is 9%*1,000 / 2.

Plugging the amounts into the formula we obtain the following answer:

Price of the bond = 287.5

Because the price of the bond is so much lower than its par value, the bond is a discount bond.