Question
In: Finance
Bonomo Corporation’s bonds have 4 years remaining to maturity. Interest is paid annually in arrears. The...
- Bonomo Corporation’s bonds have 4 years remaining to maturity. Interest is paid annually in arrears. The bonds have a par value of $1,000, and a coupon interest rate of 4.5%. (a) What is the bonds’ yield-to-maturity at a current price of $916? (b) What is the bonds’ yield-to-maturity at a current price of $1022? (c) Would you pay $916 for one of Bonomo’s bonds if you thought that the appropriate rate of interest (i.e., your expected rate of return) was 6%? (d) Why, or why not?
Solutions
Expert Solution
| (a) | Yield-to-maturity | =RATE(nper,pmt,pv,fv) | Where, | ||||
| = 6.98% | nper | = | 4 | ||||
| pmt | = | $ 45.00 | |||||
| pv | = | $ -916.00 | |||||
| fv | = | $ 1,000.00 | |||||
| (b) | Yield-to-maturity | =RATE(nper,pmt,pv,fv) | Where, | ||||
| = 3.90% | nper | = | 4 | ||||
| pmt | = | $ 45.00 | |||||
| pv | = | $ -1,022.00 | |||||
| fv | = | $ 1,000.00 | |||||
| (c) | Price of bond | =-pv(rate,nper,pmt,fv) | Where, | ||||
| = $ 948.02 | rate | = | 6% | ||||
| nper | = | 4 | |||||
| pmt | = | $ 45.00 | |||||
| fv | = | $ 1,000.00 | |||||
| (d) | Yes | ||||||
| At 6% rate of interest, price of bonds should be $ 948.02. But, it is offered at lower price of $ 916.So, it is better to but the bond at $ 916. | |||||||
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