Question 2

Two years ago, MTR issued $1,000 ten-year bonds that carry a coupon rate of 8% payable semi-annually.

Required:

a. If you require an effective annual rate of return of 12%, how much are you willing to pay for the bond today?

b. What will be the bond price if the yield to maturity falls to 6% in one year?.

c. From the answer computed in above part (b), identify, with brief explanation (within 30 words), whether the bond is issued at par, premium or discount without involving any calculation.