Question

 ​(Bond valuation​ relationships) The

1616​-year,

​$1 comma 0001,000

par value bonds of Waco Industries pay

77

percent interest annually. The market price of the bond is

​$935935​,

and the​ market's required yield to maturity on a​ comparable-risk bond is

66

percent.

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

b.  Determine the value of the bond to you given the​ market's required yield to maturity on a​ comparable-risk bond.

c.  Should you purchase the​ bond?

a.  What is your yield to maturity on the Waco bonds given the current market price of the​ bonds?

nothing​%

​ (Round to two decimal​ places.)

Answer 1

a

K = N

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

k=1

K =16

935 =∑ [(7*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^16

k=1

YTM% = 7.72

b

K = N

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

k=1

K =16

Bond Price =∑ [(7*1000/100)/(1 + 6/100)^k]     +   1000/(1 + 6/100)^16

k=1

Bond Price = 1101.06

c

Buy bond as it is underpriced