Question

 The 7​-year ​$1000 par bonds of Vail Inc. pay 9 percent interest. The​ market's required yield to maturity on a​ comparable-risk bond is 12 percent. The current market price for the bond is $ 940.

a.)Determine the yield to maturity.

b.)What is the value of the bonds to you given the yield to maturity on a​ comparable-risk bond?

c.)Should you purchase the bond at the current market​ price?

Answer 1

a

K = N

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

k=1

K =7

940 =∑ [(9*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^7

k=1

YTM% = 10.24

b

K = N

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

k=1

K =7

Bond Price =∑ [(9*1000/100)/(1 + 12/100)^k]     +   1000/(1 + 12/100)^7

k=1

Bond Price = 863.09

c

Donot buy as current price is higher than what it should be based on comparable market rate