Question

Dull Computer is planning on issuing new bonds with a par value of $1,000, maturing in 10 years and have been rated at AA. The current market rate for AA bonds maturing in 10 years is 8%. Dull Computer has decided to issue these new bonds with an 8% coupon interest rate. At what price should investors being willing to pay for these new Dull Computer bonds?
a. 958.25
b. 1,000.00
c. 1,079.85
d. 1,252.63
e. 1,398.75

Answer 1

Answer:

B,$1000

Explanation:

The price of the bond can be computed using the pv formula in excel which is  given below:

=-pv(rate,nper,pmt,fv)

rate is the yield to maturity which is 8%

nper is the time horizon of the bond which is 10 years

pmt is the yearly coupon amount payable by the bond which is 8%*$1000=$80

fv is the face value of $1000

=-pv(8%,10,80,1000)

=$1000

The issue price is $1000 which is the same as par,the quick way out is that when coupon rate and yield are the same,the bond is issued at a par value of $1000