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For each of the following situation identify whether a bond would be considered a premium bond, a discount bond or a par bond A bond’s current market price is greater than its face

For each of the following situations, identify whether a bond would be considered a premium bond, a discount bond, or a par bond. ( LG 3-2 )

a. A bond’s current market price is greater than its face value.

b. A bond’s coupon rate is equal to its yield to maturity.

c. A bond’s coupon rate is less than its required rate of return.

d. A bond’s coupon rate is less than its yield to maturity.

e. A bond’s coupon rate is greater than its yield to maturity.

f. A bond’s fair present value is less than its face value.

( LG 3-2 )

Bond Valuation Formula Used to Calculate Fair Present Values

Most bonds pay a stated coupon rate of interest to the holders of the bonds. These bonds are called coupon bonds. The interest, or coupon, payments per year, INT, are generally constant (are fixed) over the life of the bond. 5 Thus, the fixed interest payment is essentially an annuity paid to the bond holder periodically (normally semiannually) over the life of the bond. Bonds that do not pay coupon interest are called zero-coupon bonds. For these bonds, INT is zero. The face or par value of the bond, on the other hand, is a lump sum payment received by the bond holder when the bond matures. Face value is generally set at $1,000 in the U.S. bond market.

May 18 2020 View more View Less

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