Question

The Saleemi​ Corporation's ​$1,000 bonds pay 12 percent interest annually and have 15 years until maturity. You can purchase the bond for ​$905 . a.  What is the yield to maturity on this​ bond? b.  Should you purchase the bond if the yield to maturity on a​ comparable-risk bond is 15 ​percent?

Answer 1

Given about Saleemi Corporation bond,

years to maturity = 15 years

face value = $1000

coupon rate = 12% paid annually

annual coupon payment = 12% of 1000 = $120

current price of the bond = $905

a). bond's yield to maturity can be calculated using on financial calculator using following values:

FV = 1000

PV = -905

PMT = 120

N = 15

compute for I/Y, we get I/Y = 13.51

So, Yield to maturity on the bond is 13.51%

b). If yield to maturity on comparable bond is 15%

Price can be calculated using following values on financial calculator

FV = 1000

N = 15

PMT = 120

I/Y = 15

compute for PV, we get PV = -824.58

So, value of the bond based on YTM of comparable bond is $824.58

Since the actual value of the bond is more than the comparable market bonds and its YTM is also less as compare to other comparable bond, so bond should not be purchased.