Zen international chemical company has a 15% annual coupon interest rate on a $1,000 par value bond with 20 years left to maturity. Bonds of same maturity now sell to yield 11% return.
(a) How much would you be willing to pay for Zen’s bonds today? Will you buy it? Why?
(b) If the bond is selling for $ 1,141 what is the yield to maturity?
(c) Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par value?