a 10 year 5% T-Bond is issued at a price to yield 5.2%. Three months after issuance, market rates for 10 year Treasuries declines by 100 bps. Answer: At issuance bond is above par and three months later it is below par… i get 3 months later it is below par, but i thought if the yield was higher than the coupon, the bond was a discount bond?
discount bond is another way of saying Bond is below par, isn’t it?
yes but answer says that it is above par or a premium bond at issuance
Isn’t it a discount at issuance and a premium 3 months later? Coupon>Yield = Premium ? Coupon
tha’ts what i thought, ( i wrote what i thought wrong earlier) oh well, as long as i understand the concept, maybe the question is a mistake?
Yeah man, I’m using Schwser too and what sucks is the Practice Exams don’t have an analysis of the solutions.
bond price and yields are inversely related. if yield required by the market is lower than the coupon payment of the bond, the bond should trade at a premium If you do the calculation, you will get $98.46 as bond price at issuance (assuming I didn’t make any calc errors)
If yield at issuance is > coupon, bond is issued at discount to par. Also, if the market rate drops, the price should rise, so in 3 months wouldn’t the bond be at a premium above par as the coupon rate is how higher than the market rate demanded(5% > 4.2%) When I calculate it, I see the price rising to 103.18. That answer looks like an error. Have you checked the website to see if they’ve issued a correction?