Question

Harrimon Industries bonds have 5 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 10%.

1. What is the yield to maturity at a current market price of
   1. $891? Round your answer to two decimal places.

          %

   2. $1,180? Round your answer to two decimal places.

          %

2. Would you pay $891 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.

Answer 1

Given the following information,

Face value = $1000

Coupon rate = 10% = 0.10

Number of coupon payments in a year = annually = 1

Coupon payment PMT = Coupon rate*face value/Number of coupon payments in a year  = 0.10*1000 = 100

Years to maturity = 5

a. 1. Current market price = PV = 891

Calculation of YTM using excel function,

Therefore, YTM at a current market price of 891 is 13.11%

2. Current market price = PV = 1180

Calculation of YTM using excel function,

Therefore, YTM at a current market price of 1180 is 5.76%

b. YTM at 891 is 13.11%

rd = 12%

Since the bond is selling at a lower price, it is beneficial to buy the bond. Also, if this bond is held till maturity, actual return of this is 13.11% which is more than the current interest rate of similar bonds

Yes would buy the bond as long as the yield to maturity at this price is greater than your required rate of return

So the answer is V.