Question

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 10.0% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at ________.

Answer 1

Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at C) a premium.

How is the bond a premium bond ?

The bond has a face value of $1000, which is the amount the issuer will pay back at maturity. 7.5% is the assumed YTM, which is the return an investor expects to receive if they purchase the bond and hold it until maturity.

The price of a bond is inversely related to its YTM. When the YTM is lower than the coupon rate as in this case, 7.5% < 10.0%, the bond trades at a premium. This means investors are willing to pay more than the face value of the bond because it offers a higher return than the current market rate.

Options for this question are:

A) par. B) a discount. C) a premium. D) none of the above.

Answer 2

$1,513.30

Step-by-step explanation:

The Trading price of the Bond is it Present Value (PV) and is calculated as :

Fv = $1000

n = 5 × 2 = 10

pmt = ($1000 × 10.0%) ÷ 2 = $100

p/yr = 2

i = 7.5%

Pv = ?

Using a Financial Calculator, the Price of the Bond (PV) is $1,513.30.