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.

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