Question

 ​

 ​(Bond valuation)  The 14​-year $1000 face-value bonds of Vail Ltd have​ a(n) 12​%annual coupon rate. The​ market's required yield to maturity on a​ comparable-risk bond is 9​%.The current market price for the bond is

$1090

a.  Determine the yield to maturity.

b.  What is the value of the bonds to you given the yield to maturity on a​ comparable-risk bond?

c.  Should you purchase the bond at the current market​ price?

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

nothing ​% (Round to two decimal​ places.)

b.  What should be the value of the Vail bonds given the yield to maturity on a comparable risk​ bond?

​$nothing  (Round to the nearest​ cent.)

Answer 1

Answer a.

Face Value = $1,000
Current Price = $1,090

Annual Coupon Rate = 12%
Annual Coupon = 12% * $1,000
Annual Coupon = $120

Time to Maturity = 14 years

Let Annual YTM be i%

$1,090 = $120 * PVIFA(i%, 14) + $1,000 * PVIF(i%, 14)

Using financial calculator:
N = 14
PV = -1090
PMT = 120
FV = 1000

I = 10.73%

Yield to Maturity = 10.73%

Answer b.

Face Value = $1,000
Annual Coupon = $120
Time to Maturity = 14 years
Annual Interest Rate = 9%

Value of Bond = $120 * PVIFA(9%, 14) + $1,000 * PVIF(9%, 14)
Value of Bond = $120 * (1 - (1/1.09)^14) / 0.09 + $1,000 * (1/1.09)^14
Value of Bond = $120 * 7.78615 + $1,000 * 0.29925
Value of Bond = $1,233.59

Answer b.

You should purchase this bond as its market price is less than its intrinsic value.