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Why is the bond described as trading at a premium

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Reference no: EM131610677

Question: (a) What is the present value of a $1000 bond which pays $50 a year for 10 years, starting one year from now? Assume the interest rate is 5% per year, compounded annually.

(b) Since $50 is 5% of $1000, this bond is called a 5% bond. What does your answer to part (a) tell you about the relationship between the principal and the present value of this bond if the interest rate is 5%?

(c) If the interest rate is more than 5% per year, compounded annually, which is larger: the principal or the present value of the bond? Why is the bond then described as trading at a discount?

(d) If the interest rate is less than 5% per year, compounded annually, why is the bond described as trading at a premium?

Reference no: EM131610677

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