Question

 ​Stanley, Inc. issues 20​-year ​$1,000 bonds that pay ​$75 annually. The market price for the bonds is ​$863.

The​ market's required yield to maturity on a​ comparable-risk bond is 9 percent.

a.  What is the value of the bond to​ you?

b.  What happens to the value if the​ market's required yield to maturity on a​ comparable-risk bond​ (i) increases to 12 percent or​ (ii) decreases to 7 ​percent?

c.  Under which of the circumstances in part b should you purchase the​ bond?

Answer 1

(a)-Value of the Bond if the market's required yield to maturity on a​ comparable-risk bond is 9 percent

· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

· Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$75]	PMT	75
Market Interest Rate or Yield to maturity on the Bond [9.00%]	1/Y	9
Maturity Period/Time to Maturity [20 Years]	N	20
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $863.07.

The Value of the Bond will be $863.07

(b)(i)-The value of the Bond if the market's required yield to maturity increases to 12.00%

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$75]	PMT	75
Market Interest Rate or Yield to maturity on the Bond [12.00%]	1/Y	12
Maturity Period/Time to Maturity [20 Years]	N	20
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $663.88.

The Value of the Bond will be $663.88

(b)(ii)-The value of the Bond if the market's required yield to maturity decreases to 7.00%

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$75]	PMT	75
Market Interest Rate or Yield to maturity on the Bond [7.00%]	1/Y	7
Maturity Period/Time to Maturity [20 Years]	N	20
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,052.97.

The Value of the Bond will be $1,052.97

(c)-The Bond should be purchased when the market's required yield to maturity increases to 12.00%, since the Bonds are selling at a discount price of $663.88.