Problem:
The JG Investment Bank is about to issue a new series of 10 year bonds. The bonds will have a $1,000 face value and will be rated AA by a respected Bond Rating Agency. Currently the yield to maturity on AA rated bonds is 200 basis points above the yield on similar maturity government bonds. The bonds will make annual coupon payments.
A) Two years later, the YTM on 8 year goverment bonds has fallen to 2.4%. If the yield on AA rated bonds is still 200 basis points higher than a gov't bond, what is the new price of the bond? (Round to the nearest cent)
B) JG's bond now sells at? A premium? par? discount?