Question

Problem 7-9
Yield to maturity

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.
   %

Would you pay $827 for each bond if you thought that a "fair" market interest rate for such bonds was 13%-that is, if rd = 13%?

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.