Question

Harrimon Industries bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.

1. What is the yield to maturity at a current market price of
   
   1. $853? Round your answer to two decimal places.
          %
      
   2. $1,108? Round your answer to two decimal places.
          %
      
2. Would you pay $853 for each bond if you thought that a "fair" market interest rate for such bonds was 13%-that is, if r_d = 13%?
   
   1. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   2. You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond.
   3. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   4. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
   5. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
   
   
   -Select-IIIIIIIVVItem 3

• Check My Work (3 remaining)

Answer 1

calculation of YTM (Approx)

YTM ={C+(F-P)/N}/(F+P)/2

C = Coupon INTEREST i.e. 90

F =Face Value

P= Current Price

N= years to maturity

Ansa

PART 1 = {90+(1000-853)/4}/(F+P)/2

=(90+36.75)/926.50

=13.68% ( Approx)

PART 2= {90+(1000-1108)/4}/(F+P)/2

=(90-27)/1054

=6 % ( Approx)

Ans -b

Year outflow Discounting factor @ 13% present Value

1 90 0.884955752 79.6460177

2 90 0.783146683 70.4832015

3 90 0.693050162 62.3745146

4 1090 0.613318728 668.5174132

present value 881.021147

Ans. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.