Question

The Saleemi​ Corporation's ​$1000 bonds pay 5 percent interest annually and have 9 years until maturity. You can purchase the bond for ​$1135.

a.)What is the yield to maturity on this​ bond?

b.)Should you purchase the bond if the yield to maturity on a​ comparable-risk bond is 5 ​percent?

Answer 1

a

K = N

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

k=1

K =9

1135 =∑ [(5*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^9

k=1

YTM% = 3.25

b

K = N

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

k=1

K =9

Bond Price =∑ [(5*1000/100)/(1 + 5/100)^k]     +   1000/(1 + 5/100)^9

k=1

Bond Price = 1000

Donot buy as current price of 1135 is higher than intrinsic value of 1000 based on comparable rates