Suppose you are considering investing in a Telus Corp. corporate bond with a $15 000 face value
Question:
Suppose you are considering investing in a Telus Corp. corporate bond with a $15 000 face value maturing on July 23, 2024. The bond’s coupon or bond rate is 5.05 percent and interest is paid semi-annually. The current required market rate or yield to market (YTM) for a bond of this type is 2.74 percent.
(a) Carefully explain if and why this bond should sell at par, at a premium, or at a discount.
(b) Determine the purchase price or “clean price” for this bond if the purchase was made on July 23, 2018.
(c) Determine the cash price or “dirty price” for this bond if the purchase is instead made on September 28, 2018.
Step by Step Answer:
a The bond should sell at a discount because the coupon rate 505 is higher than th...View the full answer
Contemporary Business Mathematics With Canadian Applications
ISBN: 9780135285015
12th Edition
Authors: Ali R. Hassanlou, S. A. Hummelbrunner, Kelly Halliday
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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