question archive Please give me the accurate answer to the following questions along with an explanation
Please give me the accurate answer to the following questions along with an explanation
Subject:FinancePrice:2.86 Bought3
Please give me the accurate answer to the following questions along with an explanation.
1. No one should buy a premium bond because the price of the bond is expected to decline over time”. True, false, or uncertain. Explain.
2. A bond with 10 years to Maturity, a coupon rate of 8% paid semiannually, and a face value of 1000 is currently selling for $1,025. What is the Yield to Maturity on this Bond? (pls show all workings)
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ANSWER
1.
FALSE ,
the premium paid is because of the excess of coupon rate over the prevailing interest rate . since the coupon rate is better it is offset by the premium price bought to par value.
2.
YTM = C + ((F - P) / N) / (F + P) / N
= 40 + ((1000 - 1025) / 20) / (1000 + 1025) / 20
= 7.64%
