Question

Calculate the price of a 5.2 % coupon bond with 18 years left to maturity and a market interest rate of 4.6 %.(Assume interest payments are semiannual.)
Do not round intermediate calculations and round your final answer to 2 decimal places
Is this a discount or premium bond?​

Answer 1

Answer:

Bond is selling at Premium

Explanation:

It is common for bond valuation if coupon rate is greater than market interest rate than bond is selling at premium.

Suppose

Bond = $1000

Coupon rate = 5.2% / 2 = 2.6%

Market interest rate = 4.6% / 2 = 2.3%

No of year = 18 x 2 = 36 Years

using PVIFA and PVIF table value coupon amount and bond we can get the value of current market price.

Coupon is $1000 x 2.6% = $26

Par Value of bond = $1000

Using PVIFA & PVIF table at 2.3% we get the following figures.

$ 26 x 24.3026 = $631.87

$ 1000 x 0.4410 = $441.04

Current market value of bond = $1072.91