Question

Harrimon Industries bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 10%.

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

1. $908? Round your answer to two decimal places. ___%
2. $1,115? Round your answer to two decimal places. ___%

B. Would you pay $908 for each bond if you thought that a "fair" market interest rate for such bonds was 12%—that is, if r_d = 12%?

1. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
2. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
3. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
4. 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.
5. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.                                

C. Madsen Motors's bonds have 11 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 11%, and the yield to maturity is 13%. What is the bond's current market price? Round your answer to the nearest cent. $___

  

Answer 1

Face Value of Bond = $1000

Annual Coupon Payment = $1000*10% = $100

No of coupon Payments = 4 years

a), calculating the Yield to Maturity(YTM) of Bond if Price is $908 using the Excel "RATE" function:-

So, YTM is 13.10%

b), calculating the Yield to Maturity(YTM) of Bond if Price is $1,115 using the Excel "RATE" function:-

SO, YTM is 6.63%

c). Yes, you should buy the Bond as at this Price, as at this Price Bond has Yield to maturity greater than Required rate of return.

Option V

C). Face Value of Bond = $1000

Annual Coupon Payment = $1000*11% = $110

No of coupon Payments = 11 years

Yield To Maturity = 13%

Calculating the Price of Bond using the Excel "PV" function:-

So, the Price of Bond is $886.26

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