Question

​Fingen's ​16-year, ​$1000 par value bonds pay 9 percent interest annually. The market price of the bonds is ​$1,120 and the​ market's required yield to maturity on a​ comparable-risk bond is 6 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

Answer to Part a.

Face Value = $1,000
Current Price = $1,120

Annual Coupon Rate = 9%
Annual Coupon = 9% * $1,000
Annual Coupon = $90

Time to Maturity = 16 years

Let Annual YTM be i%

$1,120 = $90 * PVIFA(i%, 16) + $1,000 * PVIF(i%, 16)

Using financial calculator:
N = 16
PV = -1120
PMT = 90
FV = 1000

I = 7.67%

Annual YTM = 7.67%

Answer to Part b.

Par Value = $1,000
Annual Coupon = $90
Time to Maturity = 16 years
Market Return = 6%

Value of Bond = $90 * PVIFA(6%, 16) + $1,000 * PVIF(6%, 16)
Value of Bond = $90 * (1 - (1/1.06)^16) / 0.06 + $1,000 * (1/1.06)^16
Value of Bond = $90 * 10.105895 + $1,000 * 0.393646
Value of Bond = $1,303.18

Answer to Part c.

You should purchase this bond as it is under priced.