Catalina Marketing decides to issue 10-year bonds which...

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Finance 550 Practice Problems – More Bond Pricing - KEY Warm-Up – Questions 1-3 1. Catalina Marketing decides to issue 10-year bonds which pay fixed semi-annual coupons. The bond has a face value of $1,000 and a YTM of 10%. a. What is the coupon rate if the bond pays $40 coupons every six months?
b. What is the coupon rate if the bond pays a total of $120 every year?
c. What is the semi-annual coupon payment if the coupon rate is 7%?
2. Eight years ago, Asha Incorporated issued 30-year bonds which pay semi-annual coupons of $50 and have a face value of $1,000. a. If the YTM is 5%, is the bond selling at par, a premium to par, or a discount to par?
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2 selling at a premium to par. Alternatively, you could have done the actual calculations and determined the value of the bond. Since they issued a 30-year bond 8 years ago, there are 22 years remaining to maturity. Remember though that the coupons are semi-annual so we need to use a semi-annual rate and number of semi- annual periods. With 22 years to maturity, we have 44 semi-annual periods. Additionally, if the YTM is 5%, the semi-annual rate is 2.5% We know that the semi-annual coupon is $50, thus the price of the bond will be: 1 Price 1 (1 ) (1 ) t t C FV YTM YTM YTM 44 44 50 1 1000 Price 1 1,662.60 0.025 1 0.025 1 0.025 The bond sells at $1,662.60 which is a premium to par. On the calculator we have: N I/Y PV PMT FV 44 5 -1,662.60 50 1,000 b. If the YTM is 8%, is the bond selling at par, a premium to par, or a discount to par?

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