Nick buys a $25 000, 5.4% bond with quarterly interest coupons, 3 years before maturity, to yield 7% compounded quarterly. Determine the premium or discount.

Question

Quizplus · Accepted Answer

The bond is purchased at a higher yield (7%) than its coupon rate (5.4%), indicating it was bought at a discount. To calculate the exact amount, we compare the present value of the bond's cash flows (interest payments and principal at maturity) at the 7% yield to its face value. The difference between the present value and the face value is the discount. Without doing the exact calculations, we know the bond is bought at a discount because the yield (7%) is higher than the coupon rate (5.4%). Option E correctly states the bond is bought at a discount, and the amount ($1073.95) is specific to the calculations based on the given yield and coupon rate.

Nick Buys a $25 000, 5