Question

  The 8​-year ​$1,000 par bonds of Vail Inc. pay 8 percent interest. The​ market's required yield to maturity on a​ comparable-risk bond is 12 percent. The current market price for the bond is $880.

a.  Determine the yield to maturity.

b.  What is the value of the bonds to you given the yield to maturity on a​ comparable-risk bond?

c.  Should you purchase the bond at the current market​ price?

Answer 1

The computation is shown below:

a. For yield to maturity, we have to use the RATE formula i.e. to be presented below:

Given that

NPER = 8

PMT = $1,000 * 8% = $80

PV = $880

FV = $1,000

The formula is shown below:

RATE = RATE(NPER;PMT;-PV;FV;type)

The present values comes in negative

After applying the above formula, the yield to maturity is 10.2716%

b.

For value of the bond, we have to use the PV formula i.e. to be presented below:

Given that

NPER = 8

PMT = $1,000 * 8% = $80

RATE = 12%

FV = $1,000

The formula is shown below:

PV = -PV(RATE;NPER;PMT;FV;type)

After applying the above formula, the present value of the bond is $801.29

c. As it can be seen that the current market price is $880 and the present value of the bond is $801.29 so the bond should not purchase at the current market price as it signifies the higher value.