Your company issued a 10 percent coupon rate bond with the f

Your company issued a 10 percent coupon rate bond with the face value of $1,000. The bond pays interest rate semiannually, and the bond has 20-year to maturity, the market required interest rate on the bond is 8 percent. (2 points)

Is the bond selling at par, at discount or at premium? Explain. Write down the formula and find the price of this bond?

Solution

Since the interest is paid semiannually the bond interest rate per period is 5% (= 5% ÷ 2), the market interest rate is 4% (= 8% ÷ 2) and number of time periods are 40 (= 2 × 20). Hence, the price of the bond is calculated as the present value of all future cash flows as shown below:

semiannual coupon payment = 5% x 1000 = $ 50

Price of Bond = 50/1.04 + ...... + (50 + 1000)/1.04⁴⁰

Price of Bond = $ 1197.93

It is selling at a premium (Price > face value)