Question

 ​Fingen's 14​-year, ​$1000 par value bonds pay 13 percent interest annually. The market price of the bonds is ​$1110 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?

a.What is your yield to maturity on the Fingen bonds given the market price of the​ bonds?

Answer 1

1)

Coupon = 13% of 1000 = 130

Yield to maturity = 11.39%

Keys to use in a financial calculator:

FV 1000

PV -1110

PMT 130

N 14

CPT I/Y

2)

Value of bond = Coupon * [1 - 1 / (1 + r)^n] / r + FV / (1 + r)^n

Value of bond = 130 * [1 - 1 / (1 + 0.1)^14] / 0.1 + 1000 / (1 + 0.1)^14

Value of bond = 130 * [1 - 0.263331] / 0.1 + 263.331254

Value of bond = 130 * 7.36669 + 263.331254

Value of bond = $1,221.00

3)

You will purchase as the bond is sellng at a cheaper rate of $1110