question archive Ali noticed that the price of the 6 year corporate bond issued by Tamar BHD and explained in part (1
Subject:FinancePrice:2.86 Bought7
Ali noticed that the price of the 6 year corporate bond issued by Tamar BHD and explained in part (1.b) is greater its par value.This bond is rated as BBB.Explain the reason why Tamar BhD bond sell at premium.
1(b).The price of a 6 year corporate bond issued by Tamar bhD has a coupon rate of 9%.Assume annual compounding,1000 par value,and interest rate of 8%.
The bond sells at a premium because it is risky compared to the government bond whose rating is AAA. To compensate for this risk therefore, the bond is issued at a premium. This is realized by setting the coupon rate higher than the yield to maturity or interest rate.
Price of the bond would be given by = C * {1 - (1 + r) - n}/ r + M (1 + r) - n
C - Coupon payment
r- Interest rate
n- Time to maturity
M - Par value
C = 9% of 1,000 = 90, r = 8%, n = 6 and M = 1,000. Therefore;
Price of the bond = 90 * {1 - (1.08) - 6}/ 0.08 + 1,000 (1.08) - 6
= 90 * 6.163840 + 1,000 * 0.630170
= $1,184.92