Assume that you are considering an investment in a corporate bond with the following characteristics:

Par value $1,000

Coupon rate 6% per year

Payment schedule semiannual (January 1 and July 1)

Maturity date January 1, 2030

The bond’s current market value is 105.65 (that is, 105.65% of par value).

For this bond, assume a required rate of return equal to 5% per year.

1. draw a timeline showing the cash flows for this bond; and

2. calculate the bond value based on the required rate of return; and

3. calculate the yield-to-maturity based on the current market price.

Now, answer each of the following questions concerning the bond:

1. Is the bond selling at a premium or a discount? How do you know?

2. Is the bond value greater than par, equal to par, or less than par? Why is that the case?

3. Is the bond yield-to-maturity greater than coupon, equal to coupon, or less than coupon? Why is that the case?

4. Given the required rate of return equal to 5% per year, would you invest in this bond? Why or why not?

Answer rating: 100% (QA)

Timeline of Cash Flows January 1 2024 Coupon payment of 30 6 of 1000 July 1 2024 Coupon payment of 30 January 1 2025 Coupon payment of 30 January 1 20... View the full answer