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.