Question

(Bond valuation)  ​Fingen's 15 year, $ 1,000 par value bonds pay 12 percent interest annually. The market price of the bonds is $ 1,110 and the​ market's required yield to maturity on a​ comparable-risk bond is 9 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) No of coupon payments (N) = 15

Face Value (Future Value) = $1000

Annual coupon (PMT) = $1000 x 12% = $120

Price of bond = PV of bond = $1110

Yield to maturity of bond = ??

Using financial calculator or Rate function in excel,

Yield to maturity of bond = 10.51%

(b) compareable risk bond rate = 9%

Therefore Required rate of return (yield) = 9%

No of coupon payments (N) = 15

Face Value (Future Value) = $1000

Annual coupon (PMT) = $1000 x 12% = $120

Price of bond = PV of bond = ??

Using financial calculator or PV function in excel,

Price of bond = PV of bond = 1241.82

Therefore alue of the bond for me = $1241.82

c) Yes, I should purchase the bond since its value to me is $1241.82 and price in market is $1110

So, I can purchase a bond with value of $1241.82 at the rate of $1110

Thumbs up please if satisfied. Thanks :)