Question

(Related to Checkpoint 9.2 and Checkpoint 9.3) (Bond valuation) Fingen's

16-year,

$1,000

par value bonds pay

8

percent interest annually. The market price of the bonds is

$900

and the market's required yield to maturity on a comparable-risk bond is

11

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.)

Answer #1

a.Information provided:

Par value= future value= $1,000

Current price= present value= $900

Time= 16 years

Coupon rate= 8%

Coupon payment= 0.08*1,000= $80

Enter the below in a financial calculator to compute the yield to maturity:

FV= 1,000

PV= -900

PMT= 80

N= 16

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 9.2193.

The yield to maturity is 9.22%.

b.The value of the bond is calculated by computing the present value of the bond.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 80

N= 16

I/Y= 11

Press the CPT key and PV to compute the present value.

The value obtained is 778.6251.

Therefore, the value of the bond is $778.63.

c.I should not purchase the bond since the value of the bond is less than the market price of the bond.

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