Question

 ​(Bond valuation)  ​Fingen's

14​-year,

​$1,000

par value bonds pay

8

percent interest annually. The market price of the bonds is

​$1,100

and the​ market's required yield to maturity on a​ comparable-risk bond is

5

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?

a.  What is your yield to maturity on the Fingen bonds given the market price of the​ bonds?

nothing​%

​(Round to two decimal​ places.)

Answer 1

Answer a.

Face Value = $1,000
Current Price = $1,100

Annual Coupon Rate = 8.00%
Annual Coupon = 8.00% * $1,000
Annual Coupon = $80

Time to Maturity = 14 years

Let Annual YTM be i%

$1,100 = $80 * PVIFA(i%, 14) + $1,000 * PVIF(i%, 14)

Using financial calculator:
N = 14
PV = -1100
PMT = 80
FV = 1000

I = 6.87%

Annual YTM = 6.87%

Answer b.

Face Value = $1,000
Annual Coupon = $80
Time to Maturity = 14 years
Comparable Risk Bond Return = 5.00%

Value of Bond = $80 * PVIFA(5.00%, 14) + $1,000 * PVIF(5.00%, 14)
Value of Bond = $80 * (1 - (1/1.05)^14) / 0.05 + $1,000 / 1.05^14
Value of Bond = $1,296.96

Answer c.

You should purchase this bond as its current price is lower than the value of bond at required rate of return.