Question

 ​Fingen's 19​-year, ​$, 000 par value bonds pay 8 percent interest annually. The market price of the bonds is ​$860 and the​ market's required yield to maturity on a​ comparable-risk bond is 11 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

a.

Price = 860

Face value = 1000

Coupon Amount = 0.08* 1000 = 80

Number of payments = 19

We know that,

Price of bond = Present value of all coupon amount and face value discounted at ytm.

860 = 80/(1+ytm)^1 + 80/(1+ytm)^2 + 80/(1+ytm)^3 + 80/(1+ytm)^4 + ................. 80/(1+ytm)^19 + 1000/(1+ytm)^19

We will use the heat and trial method to get that value for which the above equation satisfies.

YTM = 9.63% Answer

OR

Using a financial calculator:

N = 19

PV = -860

PMT = 80

FV = 1000

CPT I/Y

I/Y =YTM = 9.63% Answer

b.

Required Return = 11%

Value of bond = 80/(1+ 0.11)^1 + 80/(1+0.11)^2 + 80/(1+0.11)^3 + 80/(1+0.11)^4 + ................. 80/(1+0.11)^19 + 1000/(1+0.11)^19

Value of bond = 764.82 Answer

c.

Since our expected return is lower than the required return, we will not purchase the bond.

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