Zumwalt Corporation's Class S bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid SEMIANNUALLY (2.875% each 6 months), and those bonds sell at their par value. Zumwalt's Class A bonds have the same risk, maturity, and par value, but the A bonds pay a 5.75% ANNUAL coupon. Neither bond is callable. At what price should the ANNUAL PAYMENT bond sell?

Question

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The annual payment bond should sell at $993.01. Since both bonds have the same risk and maturity, they should have the same yield. The semiannual bond has a yield of 5.75% annually, so the annual bond should also yield 5.75%. The price of the annual bond is calculated by discounting its annual coupon payments and par value at this yield rate.

Zumwalt Corporation's Class S Bonds Have a 12-Year Maturity, $1,000