Question

Harrimon Industries bonds have 6 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 10%.

- What is the yield to maturity at a current market price
of

- $833? Round your answer to two decimal places.

% - $1,211? Round your answer to two decimal places.

%

- $833? Round your answer to two decimal places.
- Would you pay $833 for each bond if you thought that a "fair"
market interest rate for such bonds was 13%-that is, if
r
_{d}= 13%?

- You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
- You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
- You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
- You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
- 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.

Answer #1

Answer a-1.

Face Value = $1,000

Current Price = $833

Annual Coupon Rate = 10%

Annual Coupon = 10% * $1,000

Annual Coupon = $100

Time to Maturity = 6 years

Let Annual YTM be i%

$833 = $100 * PVIFA(i%, 6) + $1,000 * PVIF(i%, 6)

Using financial calculator:

N = 6

PV = -833

PMT = 100

FV = 1000

I = 14.33%

Annual YTM = 14.33%

Answer a-2.

Face Value = $1,000

Current Price = $1,211

Annual Coupon Rate = 10%

Annual Coupon = 10% * $1,000

Annual Coupon = $100

Time to Maturity = 6 years

Let Annual YTM be i%

$1,211 = $100 * PVIFA(i%, 6) + $1,000 * PVIF(i%, 6)

Using financial calculator:

N = 6

PV = -1211

PMT = 100

FV = 1000

I = 5.74%

Annual YTM = 5.74%

Answer b.

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