Question

Harrimon Industries bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 8%. What is the yield to maturity at a current market price of$827? Round your answer to two decimal places. $1,036? Round your answer to two decimal places. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return. You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return. You would buy the bond as long as the yield to maturity at this price equals your required rate of return. -Select-IIIIIIIVVItem 3 |

Answer #1

Answer a.

Par Value = $1,000

Current Price = $827

Annual Coupon = 8%*$1,000 = $80

Time to Maturity = 4 years

Let Annual YTM be i%

$827 = $80 * PVIFA(i%, 4) + $1,000 * PVIF(i%, 4)

Using financial calculator:

N = 4

PV = -827

PMT = 80

FV = 1000

I/Y = 13.93%

Yield to Maturity = 13.93%

Answer b.

Par Value = $1,000

Current Price = $1,036

Annual Coupon = $80

Time to Maturity = 4 years

Let Annual YTM be i%

$1,036 = $80 * PVIFA(i%, 4) + $1,000 * PVIF(i%, 4)

Using financial calculator:

N = 4

PV = -1036

PMT = 80

FV = 1000

I/Y = 6.94%

Yield to Maturity = 6.94%

Answer c.

You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

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