Bond’s price

1. You have purchased a 10% coupon bond for $1040. What will happen to the bond’s price if market interest rates rise?

2. Suppose a seven-year, $1000 bond with an 8% coupon rate and semi-annual coupons is trading with a yield to maturity of 6.75%.

a. Is this bond currently trading at a discount, at par, or at a premium? Explain.

b. If the yield to maturity of the bond rises to 7.00% (APR with semi-annual compounding), what price will the bond trade for?

1. What was the price of this bond when it was issued?

2. Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?

3. Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?

4. Your company currently has 6% coupon-rate bonds (coupons are paid semi-annually) with 10 years to maturity and a price of $1078. If you want to issue new 10-year coupon bonds at par, what coupon rate do you need to set?

Solution:

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