Trek Star Productions has bonds trading in the secondary market that mature in 14.00 years. Each bond pays an annual coupon of $102.75 with a face value of $1,000.00. Investors in Trek Star debt currently seek an 12.00% return.

Question

Is Trek Star trading at a premium or a discount?(answer PREMIUM or DISCOUNT)

Answer 1

To determine whether Trek Star Productions' bonds are trading at a premium or a discount, we need to compare the coupon rate of the bonds to the market required return.

1. Calculate the coupon rate: \[ \text{Coupon Rate} = \frac{\text{Annual Coupon Payment}}{\text{Face Value}} = \frac{102.75}{1000} = 0.10275 \text{ or } 10.275% \]

2. Market required return: The market required return is given as 12.00%.

3. Comparison: The coupon rate (10.275%) is less than the market required return (12.00%).

When the coupon rate is less than the market required return, the bonds will trade at a discount.

Conclusion: DISCOUNT