Question

 The Saleemi​ Corporation's ​$1000 bonds pay 6 percent interest annually and have 14 years until maturity. You can purchase the bond for ​$1 075.

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 4 ​percent?

a.The yield to maturity on the Saleemi bonds is __%.

Answer 1

1)

Coupon = 13% of 1000 = 130

Yield to maturity = 5.23%

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 = 60 * [1 - 1 / (1 + 0.04)^14] / 0.04 + 1000 / (1 + 0.04)^14

Value of bond = 60 * [1 - 0.577475] / 0.04 + 577.475083

Value of bond = 60 * 10.563123 + 577.475083

Value of bond = $1,211.26

3)

You will purchase as the bond is sellng at a cheaper rate of $1075