Question

Related to Checkpoint 9.2 and Checkpoint​ 9.3)  ​(Bond valuation)  ​Fingen's 14​-year, ​\$1 000 par value bonds...

Related to Checkpoint 9.2 and Checkpoint​ 9.3)  ​(Bond valuation)  ​Fingen's 14​-year, ​\$1 000 par value bonds pay 9 percent interest annually. The market price of the bonds is ​\$1 comma 100 and the​ market's required yield to maturity on a​ comparable-risk bond is 10 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?

Par Value = \$1,000
Current Price = \$1,100

Annual Coupon Rate = 9.00%
Annual Coupon = 9.00% * \$1,000
Annual Coupon = \$90

Time to Maturity = 14 years

Let Annual YTM be i%

\$1,100 = \$90 * PVIFA(i%, 14) + \$1,000 * PVIF(i%, 14)

Using financial calculator:
N = 14
PV = -1100
PMT = 90
FV = 1000

I = 7.80%

Yield to Maturity = 7.80%

Par Value = \$1,000
Annual Coupon = \$90
Time to Maturity = 14 years
Annual Interest Rate = 10%

Value of Bond = \$90 * PVIFA(10%, 14) + \$1,000 * PVIF(10%, 14)
Value of Bond = \$90 * (1 - (1/1.10)^14) / 0.10 + \$1,000 / 1.10^14
Value of Bond = \$926.33

Value of bond is lower than the market value of bond. So, you should not purchase this bond.