3 When a bonds yield to maturity is less than the bonds coup

3. When a bond\'s yield to maturity is less than the bond\'s coupon rate, the bond A. had to be recently issued. is selling at a premium C. has reached its maturity date. D. is priced at par. E. is selling at a discount 4. The 6.5 percent bond of ABCO has a yield to maturity of &.82 percent. The bond matures in seven years, has a face value of$1,000, and pays semiannual interest payments What is the amount of each coupon payment? A. $30.00 B. $32.50 C. $68.20 D. $34.10 E. $65.00 5. The 4.5 percent bond of JL Motors has a face value of S1,000 a maturity of 7 years, semiannual interest payments, and a yield to maturity of 6.23 percent. What is the current market price of the bond? A. $945.08 B. $947.21 C. S903.05 D. $959.60 E. $912.40

Solution

Answer 3.

When a bond’s yield to maturity is less than then bond’s coupon rate, the bond is selling at a premium.

Answer 4.

Face Value = $1,000

Annual Coupon Rate = 6.5%
Semiannual Coupon Rate = 3.25%
Semiannual Coupon = 3.25% * $1,000
Semiannual Coupon = $32.50

So, each coupon payment is $32.50

Answer 5.

Face Value = $1,000

Annual Coupon Rate = 4.50%
Semiannual Coupon Rate = 2.25%
Semiannual Coupon = 2.25% * $1,000
Semiannual Coupon = $22.50

Annual YTM = 6.23%
Semiannual YTM = 3.115%

Time to Maturity = 7 years
Semiannual Period to Maturity = 14

Current Price = $22.50 * PVIFA(3.115%, 14) + $1,000 * PVIF(3.115%, 14)
Current Price = $22.50 * (1 - (1/1.03115)^14) / 0.03115 + $1,000 / 1.03115^14
Current Price = $903.05

So, current market price of this bond is $903.05