Question

 Fingen's 14​-year, ​$1,000 par value bonds pay 14 percent interest annually. The market price of the bonds is $1,110 and the​ market's required yield to maturity on a​ comparable-risk bond is 11 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?

Answer 1

Answer (a):

N = 14

FV = $1000

PMT = $1000 * 14% = $140

PV = - $1,110

Inputting these values in financial calculator, then press "CPT" and "I/Y", we get,

I/Y = 12.31%

Therefore, Bond's Yield to Maturity = 12.31%

Answer (b):

N = 14

FV = $1000

PMT = $1000 * 14% = $140

I/Y = Required Return = 11%

Inputting these values in financial calculator, then press "CPT" and "PV", we get,

PV = $1,209.46

Therefore, value of bond given required rate of return of 11% = $1,209.46

Answer (c):

~ Intrinsic Value of the bond (as per market's required rate of return) = $1,209.46

~ Market Price of the bond = $1,110

~ Since the bond is undervalued in the market, the bond should be purchased.