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
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 bonds 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.
*draw a timeline showing the cash flows for this bond; and
*calculate the bond value based on the required rate of return; and
*calculate the yield-to-maturity based on the current market price. Now, answer each of the following questions concerning the bond:
*Is the bond selling at a premium or a discount? How do you know?
Is the bond value greater than par, equal to par, or less than par? Why is that the case?
*Is the bond yield-to-maturity greater than coupon, equal to coupon, or less than coupon? Why is that the case?
*Given the required rate of return equal to 5% per year, would you invest in this bond? Why or why not?
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