Question

Harrimon Industries bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.

1. What is the yield to maturity at a current market price of
   1. $860? Round your answer to two decimal places.

          %

   2. $1,097? Round your answer to two decimal places.

          %

2. Would you pay $860 for each bond if you thought that a "fair" market interest rate for such bonds was 13%—that is, if r_d = 13%?
   1. You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond.
   2. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   3. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
   4. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
   5. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

Answer 1

ANswer summary:

Q1. 13.78%

Q2. 6.19%

Q3. II

+++++++++++++++++++++++++++++++++++++++++++++++++++++++

Other options to false because

I. as per the question we buy the bond when YTM is greater than req return

III. this is invrse to option II . so it is false

IV. if ytm and req reuteurn are same. we will not generate profit. so we will not buy.

V. I will buy the bond. They gave NOT. it should not be there.