A $1,000 corporate bond with 20 years to maturity pays a coupon of 7% (semi-annual) and the market required rate of return is a) 6.6% b) 13%. What is the current selling price for a) and b)?

Using this equation and plugging in the numbers above respectively, you get:

A) Bond selling price with a rate of return at 6.6% = $1,044.07 *with the coupon rate being higher than the market rate of return you are able to incur some interest on that value. Thus be selling at a premium

B) Bond selling price with a rate of return at 13% = $575.63 *with the coupon rate being less (almost 1/2) than the market rate of return, thus having a bond value worth half of what face value was. Thus this bond would be selling at a discount.

Jun 12th, 2015

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