CFA Video: Bond Premium/ Discount Exercise

Bonds X, Y and Z (annual coupon payment) were issued 4,5 and 6 years ago respectively. At that time, they were all priced at discount to the par value. X and Y still have 2 years to maturity and Z will mature in 3 years. If the current required yield for them are 7%, are they priced at discount or premium? Assume coupon rates for X, Y, Z are 6%, 7% and 8% respectively.

Answer:

• Bond X (assume $1000 par value)

• NPV = 1000*(0.06/1.07+1.06/1.07^2)=$982

• Discount (6%<7%)

• Bond Y (assume $1000 par value)

• NPV = 1000*(0.07/1.07+1.07/1.07^2)=$1000

• Par (7% = 7%)

• Bond Z (assume $1000 par value)

• NPV = 1000*(0.08/1.07+0.08/1.07^2+1.08/1.07^3)=$1026

• Premium (8% > 7%)

• Just comparing the coupon rate versus the required yield to find out if it is priced at discount/par/premium. Its history and maturity has no effect