9/12 .Related to Checkpoint 9.2 and Checkpoint 9.3) (Bond valuation) The 9-year $1 comma 000 par bonds of Vail Inc. pay 8 percent interest. The market's required yield to maturity on a comparable-risk bond is 7 percent. The current market price for the bond is $ 1 comma 140. a. Determine the yield to maturity. b. What is the value of the bonds to you given the yield to maturity on a comparable-risk bond? c. Should you purchase the bond at the current market price? a. What is your yield to maturity on the Vail bonds given the current market price of the bonds?
(a)-The Yield to maturity of (YTM) of the Bond
Variables |
Financial Calculator Keys |
Figure |
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
Coupon Amount [$1,000 x 8.00%] |
PMT |
80 |
Market Interest Rate or Yield to maturity on the Bond |
1/Y |
? |
Maturity Period/Time to Maturity [9 Years] |
N |
9 |
Bond Price [-$1,140] |
PV |
-1,140 |
We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the annual yield to maturity (YTM) on the bond = 5.95%.
“Hence, the Yield to maturity of (YTM) of the Bond will be 5.95%”
(b)-The value of the Bond at market's required yield to maturity on a comparable-risk bond rate of 7.00%
Variables |
Financial Calculator Keys |
Figures |
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
Coupon Amount [$1,000 x 8.00%] |
PMT |
80 |
Market Interest Rate or Yield to maturity on the Bond [7.00%] |
1/Y |
7.00 |
Maturity Period/Time to Maturity [9 Years] |
N |
9 |
Bond Price |
PV |
? |
Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,065.15.
“Hence, the Value of the Bond will be $1,065.15”
(c)-Decision
“NO”. We should not purchase the bond, since the bond is trading at a premium price of $1,065.15.
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