Assume that you are considering an investment in a corporate bond with the following characteristics: Par value
Question:
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?
Introduction to Finance Markets Investments and Financial Management
ISBN: 978-1118492673
15th edition
Authors: Melicher Ronald, Norton Edgar