Question

Fingen's 18​-year ​$1,000 par value bonds pay 14 percent interest annually. The market price of the bonds is ​$1,090 and the​ market's required yield to maturity on a​ comparable-risk bond is 11 percent.

a.  Compute the​ bond's yield to maturity. (Round to two decimal​ places.)

b.  Determine the value of the bond to​ you, given your required rate of return. (Round to two decimal​ places.)

c.  Should you purchase the​ bond?

Answer 1

a.

Price of bond = Present value of coupon amount and face value discounted at YTM

Face value = 1000

Duration = 18 years

Price = 1090

coupon Amount = 0.14*1000 =140

1090 = 140/(1+ytm)^1 +140/(1+ytm)^2 +140/(1+ytm)^3 +140/(1+ytm)^4 +140/(1+ytm)^5 +........140/(1+ytm)^18 +1000/(1+ytm)^18

Using heat and trial method

YTM = 12.71% Answer

b.

Required Return = 11%

Price of the bond = 140/(1+0.11)^1 +140/(1+0.11)^2 +140/(1+0.11)^3 +140/(1+0.11)^4 +140/(1+0.11)^5 +140/(1+0.11)^6 +...........140/(1+0.11)^18 +1000/(1+0.11)^18

Price of the bond = 1231.05 Answer

c.

Since YTM of the bond is 12.71% which is higher than the required return of 11%, we should purchase the bond.

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