Nick buys a $25 000, 5.4% bond with quarterly interest coupons, 3 years before maturity, to yield 3.5% compounded quarterly. Determine the premium or discount.

Question

Quizplus · Accepted Answer

Step 1: Calculate the number of total coupon payments
Number of coupon payments = number of years x frequency per year
Number of coupon payments = 3 x 4 = 12

Step 2: Calculate the coupon payment amount
Coupon payment = face value x coupon rate / frequency per year
Coupon payment = $25 000 x 5.4% / 4 = $337.50

Step 3: Calculate the present value of the bond
Using the financial calculator, input:
N= 12
I/Y= 0.875% (3.5%/4)
PV= ?
PMT= $337.50
FV= $25 000
Solve for PV= $25 000.26

Step 4: Compare the present value to the face value
Premium or discount = present value - face value
Premium or discount = $25 000.26 - $25 000
Premium or discount = $0.26

Since the premium or discount is less than $1, we can round it to the nearest dollar. Therefore, the bond is selling at a premium of $1, which is equivalent to $1347 premium in the answer choices.

Nick Buys a $25 000, 5