Question

Kebt Corporation's Class Semi bonds have a 12-year maturity and an 8.50% coupon paid semiannually (4.25% each 6 months), and those bonds sell at their $1,000 par value. The firm's Class Ann bonds have the same risk, maturity, nominal interest rate, and par value, but these bonds pay interest annually. Neither bond is callable. At what price should the annual payment bond sell?

Answer 1

Answer:

$1000

Explanation:

Using a financial calculator, input the following to calculate the Price( PV) of the annual coupon paying bond. Since the two bonds have the same risk, their YTMS will be equal at 8.5%.

Face value of bond ; FV = 1000

Recurring annual coupon payment = 8.5% *1000 = $85

Annual interest rate aka YTM ; I =8.5%

Time to maturity of bond = 12

then compute a PV = $1000