Consider the following three bond quotes: a Treasury bond quoted at 103:29, a co
ID: 2736816 • Letter: C
Question
Consider the following three bond quotes: a Treasury bond quoted at 103:29, a corporate bond quoted at 96.30, and a municipal bond quoted at 100.70. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars? (Do not round intermediate calculations and round your final answers to 2 decimal places.)
Treasury note $
Corporate bond $
Municipal bond $
Compute the price of a 4.7 percent coupon bond with 15 years left to maturity and a market interest rate of 7.2 percent. (Assume interest payments are semiannual.) (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Bond price $
Is this a discount or premium bond?
Explanation / Answer
Requirement 1
1) Price of Corporate bond = 1000 * 96.30 % = $ 963
2) Price of municipal bond = 5000 * 100.70 % = $ 5035
3) Price of Treasury note = (103 + 29 / 34) % * 1000 = 103.85 % * 1000 = $ 1038.5
Requirement 2
Let the par value of coupon bond = $ 100
i = Rate of interest = 4.7 / 2 = 2.35 % (Compounded semi-annually) , T = time period = 15 * 2 = 30 Semi-annual periods and Discounting rate = 7.2 / 2 = 3.6 %
Present value of coupon bond payment = 100 * 2.35 % * Cumulative present value factor for 30 years @ 3.6 % + 100 * Present value factor for 30TH year @ 3.6 %
Present value of coupon bond payment = 2.35 * 18.164 + 100 * 0.346
Present value of coupon bond payment = $ 77.2854
Thus, the bond is selling at discount.
(NOTE):- If coupon rate of bond is less than market interest rate, then the bond is treated to be sell at discount.