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:Apar.Ba discount.Ca premium.DNone of the given.SUBMIT
Question
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:Apar.Ba discount.Ca premium.DNone of the given.SUBMIT
Solution
To answer this question, we first need to understand a few key terms:
- Face Value: This is the amount paid to the holder at maturity; in this case, it's $1000.
- Coupon Rate: This is the interest rate stated on the bond and paid to the holder. Here, it's 8% annually, but since payments are semi-annual, each payment will be 4% of the face value.
- Yield to Maturity (YTM): This is the total return anticipated on a bond if it is held until maturity. In this case, it's 7.5% per year, or 3.75% semi-annually.
Now, to determine whether the bond is trading at a premium, discount, or par, we need to compare the coupon rate with the YTM.
- If the coupon rate is higher than the YTM (as in this case, 8% > 7.5%), the bond will trade at a premium.
- If the coupon rate is lower than the YTM, the bond will trade at a discount.
- If the coupon rate is equal to the YTM, the bond will trade at par.
So, in this case, the bond will trade at a premium. Therefore, the answer is C.
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