Question

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?

Answer 1

Answer a.

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%

Answer b.

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

Answer c.

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