(Related to Checkpoint 9.2 and Checkpoint 9.3) (Bond valuation) Fingen's 14 -year, $1 comma 000 par value bonds pay 9 percent interest annually. The market price of the bonds is $1 comma 100 and the market's required yield to maturity on a comparable-risk bond is 10 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? a. What is your yield to maturity on the Fingen bonds given the market price of the bonds? nothing % (Round to two decimal places.)
a. What is your yield to maturity on the Fingen bonds given the market price of the bonds?
a) Yield to Maturity=r
Market Price:1100, Face value=1000, coupon rate=9%, market
rate=10%
coupon payment= 9% of Face value=0.09*1000=90
Price of the bond is calcuated by Sum of PV of all the coupon payments
1100=90/(1+r)+90/(1+r)2+..........+90/(1+r)14
Solve for r
r= 7.8%
B) Value of the bond
Since the current market rate is 10% you would expect at least 10%
return on your investment so your required rate of return would be
10%
Value of Bond=
90/(1+.1)+90/(1+.1)2+..........+90/(1+.1)14
Value of Bond= $926.33
C)No it is not suggestable to buy this bond as the Value of the Bond which is $926.33 is less than the current market price which is $1100.Which means you'll be paying $1100 for a bond which has an intrinsic value of $926.33
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