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.

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