Question

Fingen's 16​-year, ​$1000 par value bonds pay 9 percent interest annually. The market price of the bonds is ​$1070 and the​ market's required yield to maturity on a​ comparable-risk bond is 7 percent.

a.  Compute the​ bond's yield to maturity. (round to 2 decimal places)

b.  Determine the value of the bond to​ you, given your required rate of return.

c.  Should you purchase the​ bond?

Answer 1

Dear Student,

a) YTM = [Coupen Amount + {(Face Value - Price)/N} ] / [(Face Value + Price)/N]

= [90 + {(1000 - 1070)/16} ] / [(1000 + 1070)/2]

= 8.27%

b) Value of Bond at r = 7%

Value = Coupen Amount * PVAF (7,16) + Face value * PVIF (7,16)

           = 90 * 9.4466 + 1000 * 0.3387

           = $ 1188.89

c) Since the market price is 1070 whereas the value of bond is 1188.89, thus the bond is underpriced. It should be purchased.