Question

The Saleemi​ Corporation's ​$1000 bonds pay 9 percent interest annually and have 9 years until maturity....

The Saleemi​ Corporation's ​$1000 bonds pay 9 percent interest annually and have 9 years until maturity. You can purchase the bond for ​$1125.

a.  What is the yield to maturity on this​ bond?

b.  Should you purchase the bond if the yield to maturity on a​ comparable-risk bond is 6 ​percent?

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Answer #1

a. The Yield to Maturity (YTM) or yield of a bond is the total expected return for a bond held until maturity.

In the given question, for a bond with Face Value (FV) = 1000, coupon rate = 9%, tenure = 9 years and Present value of bond (PV) = $1125 we can calculate the YTM through the Present Value Discounting method using the financial calculator.

Considering the above values we can calculate that the yield to maturity or YTM of the bond is 7.0753%

b. Yes, we should purchase the bond if the yield to maturity on a co.mparable risk bond is 6% because Saleemi Corporation's bond is paying excess returns for the same level of risk taken

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