Question

(Bond valuation​ relationships) The 18​-year, ​$1 comma 000par value bonds of Waco Industries pay 9percent interest annually. The market price of the bond is ​$885

​,and the​ market's required yield to maturity on a​ comparable-risk bond is 12percent.

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.

Should you purchase this bond?

Answer 1

a

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =18

885 =∑ [(9*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^18

k=1

YTM% = 10.44

b

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =18

Bond Price =∑ [(9*1000/100)/(1 + 12/100)^k]     +   1000/(1 + 12/100)^18

k=1

Bond Price = 782.51

c

Donot buy as value of bond based on comparable rate is lesser the current market price of bond