I can’t see where they got a par value for this bond??? An investor buys a 20-year, 10 percent semi-annual bond for $900. She wants to sell the bond in 6 years when she estimates yields will be 10 percent. What is the estimate of the future price? A) $946. B) $1,079. C) $1,000. D) $1,152. Your answer: D was incorrect. The correct answer was C) $1,000. Since yields are projected to be 10 percent and the coupon rate is 10 percent, we know that the bond will sell at par value.
If YTM equals coupon, typically the bond sells at par. How did you calculate 1,152?
I agree with DarienHacker. Correct answer is C). If yield equals coupon then bond sells at face value.
Thought the bond is currently yielding 5.63%, she has projected it to yield 10% on the selling date which is the same as the coupon rate. So it’s a par bond and the ans is 1000. C is the correct answer… If by chance, we trip and assume 5.63% as the I/Y in the calc, we get ‘A’ as the answer. - Dinesh S
I just selected D as it looked the worst answer. I’m using the tests to identify area’s of weakness so I can focus my study, therefore if I’m unsure just go for the worst. I understand the fact that since coupon = yield then the bond is at par. So we are to assume that the par value is 1000 (logically i agree based on the answers they provided) without information on the type of bond… if they had an answers of 100 and 1000, would you still select 1000 because it closer to the $900 price?? thanks for you help! cheers otaw
Do you have an introductory text on bonds or fixed-income instruments? Something that would cover topics like coupon payments, yield, and so forth? Give that a careful read. BTW, http://www.investopedia.com/terms/p/par.asp
thanks Darien
That would be pretty awful if they ask that in that way. I think the easy way is to look at how they presented the PV of the bond in the problem - $900. I can’t imagine a scenario where they would ask for the answer as ‘100’ in this case.