Question

Corporation bonds have six years remaining to maturity. Interest is paid annually, the bonds have $10,000 par value, and the coupon interest rate is 8%. Would you buy the bond if its current market price is $9000 and the yield to maturity is 10%?

(answer with steps please)

Answer 1

The Bonds pay $10000 *8% = $800 at the end of every year for six years and $10000 par value at the end of sixth year

Intrinsic value of the bonds = present value of bond payments discounted at YTM

= 800/1.1+800/1.1^2+ 800/1.1^3+ 800/1.1^4+ 800/1.1^5+ 800/1.1^6+ 10000/1.1^6

= 800/0.1*(1-1/1.1^6)+10000/1.1^6

=$9128.95

As the actual market price is $9000 , the bonds are available at a cheaper price than their intrinsic value

Hence , the bonds should be bought if its current market price is $9000