Bond X is a bond with a coupon rate of 18 percent that makes annual payments. It has a poor rating that bond issuer might not pay the interest and/or principal payments. Bond Y is a bond with a coupon rate of 6 percent that makes semi-annual payments. It is actively traded on the secondary market. Both bonds have face value of $1,000 with eight years to maturity and the current yield to maturity (YTM) is 8 percent.

(a) Based on the provided information, determine and explain whether Bond X and Y is selling at premium, discount or par without using any calculation respectively.

(b) Determine the current yield of Bond X and Bond Y respectively.

(c) Based on the provided information, identify TWO different risk premiums in bond X and Y respectively. Briefly describe how each of these risk premiums affects a bond's required return.

Answer rating: 100% (QA)

a Based on the provided information Bond X is selling at a discount This is because its coupon rate of 18 is higher than the current YTM of 8 which ma... View the full answer