Question

The Saleemi​ Corporation's ​$1,000 bonds pay 7 percent interest annually and have 14 years until maturity. You can purchase the bond for ​$865.

a.  What is the yield to maturity on this​ bond?

b.  Should you purchase the bond if the yield to maturity on a​ comparable-risk bond is 10%

​

Answer 1

Answer-

Saleemi​ Corporation's

Face value = Par value = FV = $ 1000
Present value = PV = $ 865
Payments = PMT = 7 % x $ 1000 = $ 70
Number of years = N = 14

Yield to maturity = YTM = I/Y = ?

Substituting all the values in fiinancial calulator we get

YTM = I/Y = 8.7 %

The Yield to maturity of the bond = YTM = 8.7 %

b)

Face value = Par value = FV = $ 1000
Payments = PMT = 7 % x $ 1000 = $ 70
Number of years = N = 14

The Yield to Maturity on a comparable risky bond

Yield to maturity = YTM = I/Y = 10 %

Present value = PV = ?

Input all the values we get

Present value = PV = $ 778.99 ~ $ 779

One should not purchase the bond at $ 865 if the YTM on a comparable risky bond = 10 % as it is available at a lower price of $ 779.