Question

​Fingen's ​16-year, ​\$1000 par value bonds pay 9 percent interest annually. The market price of the...

​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?

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%

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

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