Assume it is November 9, 2009. This morning you were reading your favorite newspaper. On the financial page you have found the following information on the bonds issued by ABC Inc. Unfortunately, as you were just a little bit stressed for your classes you mistakenly dropped some coffee exactly on the number indicating the price of the bonds!
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Coupon rate
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Maturity date
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Bid Price
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Yield (%)
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ABC Inc.
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7.000
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May 9/14
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?
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8.94
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(a) Are the bonds selling at a discount, at par or at a premium? Justify your answer.
(b) If the bond just paid a coupon today (November 9, 2009), what would the current price be? (assume that the bond makes semiannual payments)
(c) Another bond on the market issued by MNP Inc. has 6% coupon bonds with 7 years left to maturity. The bonds make semiannual payments and are selling for $1,000. What is the YTM?
(d) If you anticipate a decrease in interest rates in the future, in which of the two bonds should you invest? Justify your answer.