1. Set up the calculation to arrive at the market value of a new bond having a face amount of $1,000, annual interest rate of 7% payable semiannually, callable at the end of five years (call price of 106) and 25 years remaining maturity at a 6% yield to call. (Do not use a calculator. Show the appropriate equation and data substitution.) At this yield will the bond trade at par, a discount or a premium

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Business

Kendall Terry

3 September, 08:17

1. Set up the calculation to arrive at the market value of a new bond having a face amount of $1,000, annual interest rate of 7% payable semiannually, callable at the end of five years (call price of 106) and 25 years remaining maturity at a 6% yield to call. (Do not use a calculator. Show the appropriate equation and data substitution.) At this yield will the bond trade at par, a discount or a premium

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Answers (1)

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Piper Wilson · Answer 1

The market value of a new bond having a face amount of $1,000, annual interest rate of 7% payable semiannually will be $1042.651014

Explanation:

Given the following:

Face value=1000

Coupon rate=7%

Yield to call=6%

Time to call=5

The formula is given as:

Price=Face Value * (coupon rate/2) / (yield to call/2) * (1-1 / (1+yield to call/2) ^ (2*time to call)) + Face Value / (1+yield to call/2) ^ (2*time to call)

Therefore:

Price = 1000 * (7%/2) / (6%/2) * (1-1 / (1+6%/2) ^ (2*5)) + 1000 / (1+6%/2) ^ (2*5)

=$1042.651014

At yield of 6%, the bond will trade at premium because bond trades at premium when coupon rate is more than yield