Question

(Bond valuation? relationships) The 13?-year, ?$1,000 par value bonds of Waco Industries pay 8 percent interest annually. The market price of the bond is ?$1,105?, and the? market's required yield to maturity on a? comparable-risk bond is 5 percent.

a. Compute the? bond's yield to maturity.

b. Determine the value of the bond to you given the? market's required yield to maturity on a? comparable-risk bond.

c. Should you purchase the? bond?

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

_______% ? (Round to two decimal? places.)

Answer 1

1,105 = 80 * PVAF_(YTM,13y) + 1,000 * PVF_(YTM,13y)

For 6%, Value = 80 * PVAF_(6%13y) + 1,000 * PVF_(6%,13y)

= = 80 * 8.853 + 1,000 * 0.469 = 1,177.24

or 7%, Value = 80 * PVAF_(7%13y) + 1,000 * PVF_(7%,13y)

= = 80 * 8.358 + 1,000 * 0.415 = 1,083.64

NOw, interpolating 6% and 7%, we get YTM =

6% + ((1,177.24 - 1,105.00) / (1,177.24 - 1,083.64))6.76%

b. NOw, YTM = 5%

Value = 80 * PVAF_(5%13y) + 1,000 * PVF_(5%,13y)

₌ 80 * 9.394 + 1,000 * 530 = 1,281.52

c. Yes, the bond should be purchsed because it is available at a cheaper rate i.e 1,105 rather than 1,281.52

d. YTM is calculated in the first part i.e 6.76%.