Question

  The Saleemi​ Corporation's ​$1000 bonds pay 8 percent interest annually and have 12 years until maturity. You can purchase the bond for ​$935. a.  What is the yield to maturity on this​ bond? b.  Should you purchase the bond if the yield to maturity on a​ comparable-risk bond is 7 ​percent? a.  The yield to maturity on the Saleemi bonds is

Answer 1

a.Information provided:

Future value= $1,000

Coupon rate= 8%

Coupon payment= 0.08*1,000= $80

Time= 12 years

Present value= $935

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PMT= 80

N= 12

PV= -935

Press the CPT key and I/Y to calculate the yield to maturity.

The value obtained is 8.90.

Therefore, the yield to maturity is 8.90%.

b.Yes, you should purchase the bond since it provides a higher return than that of a comparable bond which is only 7%.

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