52.2
2.Is the bond from question #1 priced at par, a premium, or a
discount? Explain why it is priced as it is. For
example, if it is priced at a discount, explain why traders
are pricing it at a discount. (2 pts)
The bond is priced at a slight premium. In order for it to be priced at a premium, it must be the case that it is offering a higher coupon rate than current market interest rates. Current rates appear to be approximately 6.7% [(100/93.75) - 1] per year. Thus, new bonds would offer coupons of 6.7% and be priced at $1000. This bond offers coupons of 7%, so it cannot also be priced at $1000 (no one would want to buy the new bonds). The price of our bond increases until people are indifferent between paying a higher price for 7% coupons or a lower price for 6.7% coupons.