Question

The 8-year, $1,000 par bonds of Smith Inc. pay 14 percent interest. The​ market's required yield to maturity on a​ comparable-risk bond is 17 percent. The current market price for the bond is $940.

1. What is your yield to maturity on the Smith bonds given the current market price of the​ bonds? _%

Please round to two decimal places.

2. What should be the value of the Smith bonds given the yield to maturity on a comparable risk​ bond? $_

Please round to the nearest cent.

3. You should or should not purchase the Smith bonds at the current market price because they are currently over or under priced. Please select one of each.

Answer 1

A) Using financial calculator (BA II plus) to calculate the ytm of the bond

Inputs: N= 8

Pv= -940

Pmt= 140 ( 14% × 1,000)

Fv= 1,000

I/y (ytm)= compute

We get, ytm of the bond as 15.35%

B) Using financial calculator to calculate the value of the bond

Inputs: N= 8

I/y= 17%

Pmt= 140 ( 14%×1,000)

Fv= 1,000

Pv= compute

We get, value of the bond as $873.79

C) As we can see from the above data, the ytm of the Smith's bond is less than that of the comparable bond. So, Smith's bond is overpriced as compared to comparable bond due to low ytm of the Smith's bond.