Question

The 19​-year, ​$1000 par value bonds of Waco Industries pay 8 percent interest annually. The market price of the bond is ​$1105​, and the​ market's required yield to maturity on a​ comparable-risk bond is 5 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? ____% ​ (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 =19

1105 =∑ [(8*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^19

k=1

YTM% = 7

Using Calculator: press buttons "2ND"+"FV" then assign

PV =-1105

PMT = Par value * coupon %=1000*8/(100)

N =19

FV =1000

CPT I/Y

Using Excel

=RATE(nper,pmt,pv,fv,type,guess)

=RATE(19,-8*1000/(100),1105,-1000,,)

b

K = N

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

k=1

K =19

Bond Price =∑ [(8*1000/100)/(1 + 5/100)^k]     +   1000/(1 + 5/100)^19

k=1

Bond Price = 1362,6

Using Calculator: press buttons "2ND"+"FV" then assign

PMT = Par value * coupon %=1000*8/(100)

I/Y =5

N =19

FV =1000

CPT PV

Using Excel

=PV(rate,nper,pmt,FV,type)

=PV(5/(100),19,-8*1000/(100),-1000,)

c

Buy as current price of 1105 is less than intrinsic value