Question

 ​Fingen's 19​-year, ​$1000 par value bonds pay 15 percent interest annually. The market price of the bonds is ​$1110 and the​ market's required yield to maturity on a​ comparable-risk bond is 12 percent.

a.)Compute the​ bond's yield to maturity.

b.)Determine the value of the bond to​ you, given your required rate of return.

c.)Should you purchase the​ bond?

Answer 1

a

K = N

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

k=1

K =19

1110 =∑ [(15*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^19

k=1

YTM% = 13.38

b

K = N

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

k=1

K =19

Bond Price =∑ [(15*1000/100)/(1 + 12/100)^k]     +   1000/(1 + 12/100)^19

k=1

Bond Price = 1220.97

c

Buy bond as current market price is less than what it should be based on comparable market rate