A company issues a callable (at par)ten-year,6% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a yield to maturity of 4.8%,which is below the yield to call.What is the price of this bond per $100 of face value when it is released?

Question

Quizplus · Accepted Answer

The bond is priced above par because its coupon rate (6%) is higher than its yield to maturity (4.8%). When the coupon rate is higher than the yield to maturity, the bond offers more periodic income than what is currently required by the market, making it more valuable. Therefore, it will be priced at a premium to its face value. The correct calculation involves discounting the bond's cash flows (annual coupons and the principal repayment) at the yield to maturity. Since the yield to call is not given and is mentioned to be lower than the yield to maturity, the bond is likely to be called as soon as possible if interest rates do not change. However, the price given is when the bond is released, and it is based on the yield to maturity because the bond is not callable immediately. The correct price is thus higher than par value, making option B the correct choice without needing to perform the exact calculation for this question.

A Company Issues a Callable (At Par)ten-Year,6% Coupon Bond with Annual