WXAM has an outstanding bond issue with a coupon rate of 6 1/8% and a current yield of 6.9%. The yield to maturity on this bond is 7 5/8%. What is the market price of this bond if it pays interest semi-annually and has 12 years to maturity?

Question

Quizplus · Accepted Answer

The market price of a bond is determined by its coupon rate, current yield, yield to maturity, and the time to maturity, among other factors. Given that the bond's current yield is higher than its coupon rate (6.9% vs. 6 1/8%), and its yield to maturity is even higher (7 5/8%), this indicates the bond is selling at a discount to its face value. The exact price can be calculated using the bond pricing formula, which takes into account the present value of the bond's future cash flows (coupon payments) and the principal repayment at maturity, discounted back at the bond's yield to maturity. Without performing the exact calculation, it's clear that the bond would be priced at a discount, and among the provided options, $883.42 is the only one that reflects a discount, making it the correct choice.

WXAM Has an Outstanding Bond Issue with a Coupon Rate