Question

You consider purchasing a bond described in the table below. Decide if you should purchase the bond (Yes or No)

Bond face value ($)	$10,000
Bond purchase price ($)	$9,000
Life of the bond (years)	10
Coupon rate (%)	6%
Compounding periodicity	Annual
MARR (%)	8%

Answer 1

Ans. To reach at the conclusion of whether to buy the bond or not, we have to calculate yield to maturity of the bond.

Purchase price of the bond, P = $9000

Face value of the bond, F = $10000

Yield to maturity, n = 10 years

Coupon rate, c = 6% or 0.06

Coupon payment, C = c*F = $600

MARR = 8%

Yield to maturity, y = ?

Using the formula for price of the bond, we get,

P = C*[(1-1/(1+y)^n]/y + F/(1+y)^n

=> 9000 = 600*[(1-1/(1+y)^10]/y + 10000/(1+y)^n

=> y = 0.07454 or 7.454%

So, bond should not be purchased as the yield to maturity is less than the MARR.

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