A $1,000 par value bond is for sale. Its coupon rate is 3.50% and it will be outstanding for 4 years.
Current rates (discount rate or opportunity cost of money) are only 2.20%.
- Question 1: Without doing any math, do you think the price (value) of this bond is going to be higher or lower than $1,000 ?
- Question 2: Now, do the math. What is the market price of this bond, given the above facts?
- Question 3: Would you predict the current yield on this bond to be higher or lower than the coupon rate?
- Question 4: What is the current yield on this bond ?
- Question 5: Would you expect the Yield to Maturity of this bond to be higher or lower than its coupon rate?
- Question 6: Would you expect the Yield to Maturity of this bond to be higher or lower than its current yield?
- Question 7: Calculate the Yield to Maturity of this bond.