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 8%.

a) What is the yield to maturity at a current market price of $792? Round your answer to two decimal places. %

b) What is the yield to maturity at a current market price of $1,068? Round your answer to two decimal places. %

c) Would you pay $792 for each bond if you thought that a "fair" market interest rate for such bonds was 13%-that is, if rd = 13%? (options listed below)

1) You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

2)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.

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

4)You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.

5) You would buy the bond as long as the yield to maturity at this price equals your required rate of return.

Answer 1

a)

Hence, Yield to maturity is 14.07%

b)

Hence, Yield to maturity is 6.37%

c)

Correct option is 5

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