Question

 ​(Bond valuation)  ​Fingen's 19​-year, ​$1000 par value bonds pay 12 percent interest annually. The market price of the bonds is ​$1150 and the​ market's required yield to maturity on a​ comparable-risk bond is 9 percent.

a.  Compute the​ bond's yield to maturity.

b.  Determine the value of the bond to​ you, given your required rate of return.

c.  Should you purchase the​ bond?

Answer 1

Bond Par Value = $1,000

Time to Maturity = 19 years

Coupon rate = 12% annually

Market Price of Bond = $1,150

Required Rate of Return = 9%

a.

Bond's YTM,

Using TVM calculation,

YTM = [PV = 1150, FV = 1000, PMT = 120, T = 19]

YTM = 10.18%

b.

As per required rate of return = 9%

Using TVM calculation,

PV = [FV = 1000, T = 19, PMT = 120, I = 9]

PV = $1,268.5

c.

For required rate = 9%,

Present value of Bond = 1268.5

But we are getting bond at $1,150 so we'll purchase the bond.