The 17 year, $1000 par value bonds of Waco Industries pay 6 percent interest annually. The...

The 17 year, $1000 par value bonds of Waco Industries pay 6 percent interest annually. The market price of the bond is $945, and the market's required yield to maturity on a comparable-risk bond is 5 percent.

a. Compute the bond's yield to maturity.

b. Determine the value of the bond to you given the market's required yield to maturity on a comparable-risk bond.

c. Should you purchase the bond?

Expert Solution

(a)- The bond's yield to maturity.

The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)


Variables	Financial Calculator Keys	Figure

Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 6%]	PMT	60
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [17 Years]	N	17
Bond Price [-$945]	PV	-945

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the yield to maturity (YTM) on the bond = 6.55%.

“Hence, the yield-to-maturity of the Bond will be 6.55%”

(b)-The value of the Bond at market's required yield to maturity on a comparable-risk bond rate of 5.00%.

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value. The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

Here, the calculation of the Bond Price using financial calculator is as follows


Variables	Financial Calculator Keys	Figures

Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 6%]	PMT	60
Market Interest Rate or Yield to maturity on the Bond [5.00%]	1/Y	5
Maturity Period/Time to Maturity [17 Years]	N	17
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond = $1,112.74.

(c)-Decision

“NO”. We should not purchase the bond, since the bond is trading at a premium price of $1,112.74.

jeff jeffy answered 7 months ago

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