Question

Problem 5-10
Yield to Maturity and Required Returns

The Brownstone Corporation's bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 9%.

1. 1. What is the yield to maturity at a current market price of $832? Round your answer to two decimal places.
      %
      
   2. What is the yield to maturity at a current market price of $1,093? Round your answer to two decimal places.
      %
   
   
2. Would you pay $832 for one of these bonds if you thought that the appropriate rate of interest was 13% - that is, if r_d = 13%.
   -Select-YesNoItem 3
   
   Explain your answer.
   
   I. You would buy the bond as long as the yield to maturity at this price does not equal your required rate of return.
   II. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   III. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
   IV. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
   -Select-IIIIIIIVItem 4

Answer 1

Time to Maturity = 5 years

Par Value = $1,000

Coupon Rate = 9%

a.

Present value of Bond = $832

Using TVM Calculation,

I = [FV = 1000, PV = 832, T = 5, PMT = 90]

I = 13.76%

b.

Present value of Bond = $1093

Using TVM Calculation,

I = [FV = 1000, PV = 1093, T = 5, PMT = 90]

I =6.78%

c.

Yes one would buy the bond at $832 as YTM is greater than 13%

You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.