Q2) The Chadstone Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semi-annually. Assuming the appropriate YTM on the bond is 7.5%, then this bond will trade at: A par. B a discount. C a premium. D None of the given. SUBMIT
Question
Q2) The Chadstone Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semi-annually. Assuming the appropriate YTM on the bond is 7.5%, then this bond will trade at:
A par.
B a discount.
C a premium.
D None of the given. SUBMIT
Solution
To answer this question, we need to understand a few key concepts:
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Coupon Rate: This is the interest rate stated on a bond when it's issued, which is used to calculate the semi-annual payments. In this case, it's 8%.
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Yield to Maturity (YTM): This is the total return anticipated on a bond if it is held until it matures. In this case, it's 7.5%.
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Face Value: This is the amount the bond will be worth at its maturity, and is also the reference amount the bond issuer uses when calculating interest payments. In this case, it's $1000.
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Bonds trading at par, discount, or premium: If the YTM (market interest rate) is equal to the coupon rate, the bond is trading at par (face value). If the YTM is greater than the coupon rate, the bond is trading at a discount. If the YTM is less than the coupon rate, the bond is trading at a premium.
In this case, the coupon rate is 8% and the YTM is 7.5%. Because the YTM is less than the coupon rate, the bond will trade at a premium. So, the answer is C) a premium.
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