Suppose a seven-year, $1,000 bond with an 8.4% coupon rate and semiannual coupons is trading with a yield to maturity of 6.38%. a. Is this bond currently trading at a discount, at par, or at a premium? Explain. p. If the yield to maturity of the bond rises to 7.43% (APR with semiannual compounding), what price will the bond trade for? ..... a. Is this bond currently trading at a discount, at par, or at a premium? Explain. (Select the best choice below.) O A. Because the yield to maturity is greater than the coupon rate, the bond is trading at a premium. B. Because the yield to maturity is less than the coupon rate, the bond is trading at a discount. C. Because the yield to maturity is less than the coupon rate, the bond is trading at a premium. D. Because the yield to maturity is greater than the coupon rate, the bond is trading at par. p. If the yield to maturity of the bond rises to 7.43% (APR with semiannual compounding), what price will the bond trade for? The new price of the bond is $ . (Round to the nearest cent.)
Suppose a seven-year, $1,000 bond with an 8.4% coupon rate and semiannual coupons is trading with a yield to maturity of 6.38%. a. Is this bond currently trading at a discount, at par, or at a premium? Explain. p. If the yield to maturity of the bond rises to 7.43% (APR with semiannual compounding), what price will the bond trade for? ..... a. Is this bond currently trading at a discount, at par, or at a premium? Explain. (Select the best choice below.) O A. Because the yield to maturity is greater than the coupon rate, the bond is trading at a premium. B. Because the yield to maturity is less than the coupon rate, the bond is trading at a discount. C. Because the yield to maturity is less than the coupon rate, the bond is trading at a premium. D. Because the yield to maturity is greater than the coupon rate, the bond is trading at par. p. If the yield to maturity of the bond rises to 7.43% (APR with semiannual compounding), what price will the bond trade for? The new price of the bond is $ . (Round to the nearest cent.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:**Bond Pricing Scenario: Analysis and Explanation**
Suppose a seven-year, $1,000 bond with an 8.4% coupon rate and semiannual coupons is trading with a yield to maturity of 6.38%.
**Questions:**
**a. Is this bond currently trading at a discount, at par, or at a premium? Explain.**
*(Select the best choice below.)*
- ☐ A. Because the yield to maturity is greater than the coupon rate, the bond is trading at a premium.
- ☐ B. Because the yield to maturity is less than the coupon rate, the bond is trading at a discount.
- ☑ C. Because the yield to maturity is less than the coupon rate, the bond is trading at a premium.
- ☐ D. Because the yield to maturity is greater than the coupon rate, the bond is trading at par.
**b. If the yield to maturity of the bond rises to 7.43% (APR with semiannual compounding), what price will the bond trade for?**
The new price of the bond is $_____. *(Round to the nearest cent.)*
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**Explanation:**
- **Correct Answer to Part a:** Option C is correct. A bond is trading at a premium when its yield to maturity is less than the coupon rate. In this scenario, the bond has a coupon rate of 8.4% and the yield to maturity is 6.38%, meaning the bond's coupon payments are more attractive than the yield, causing the bond price to rise above its face value.
- **For Part b:** Calculation is required to determine the new price of the bond when the yield to maturity becomes 7.43% with semiannual compounding. The price will adjust based on the change in yield to maturity, reflecting current market conditions.
*(Note: An actual computation would involve present value calculations of the bond’s cash flows based on the new yield to maturity.)*
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