Doisneau 17-year bonds have an annual coupon interest of 13 percent, make intere

ID: 2729520 • Letter: D

Question

Doisneau 17-year bonds have an annual coupon interest of 13 percent, make interest payments on a semiannual basis, and have a $1,000 par value. If the bonds are trading with market's required yield to maturity of 14 percent, are these premium or discount bonds? Explain your answer. What is the price of the bonds? If the bonds are trading with a yield to maturity of 1.4%, then There is not enough information to judge the value of the bonds. the bonds should be selling at a discount because the bond's coupon rate is less than the yield to maturity of similar bonds. the bonds should be selling at par because the bond's coupon rate is equal to the yield to maturity of similar bonds. the bonds should be selling at a premium because the bond's coupon rate is greater than the yield to maturity of similar bonds. The price of the bonds is $.

Explanation / Answer

Face Value = $1,000

Duration = 17 years

Coupon = $130 ($1,000*13%)

YTM = 14%

As the bond is paying coupon semi-annually, then

Divide the coupon rate by 2

Divide the YTM by 2

Multiply the duration with 2

Year

Particulars

Cash Flow (in $)

Discounting Factor@7%

Discounted Cash Flow (in $)

1-34

Coupon

12.85

835

Redemption value

1,000

0.10

100

Current Price of the Bond

935

Note: It is assumed that the bond is redeemed at Par value, decimals are rounded off to nearest $.