In: Finance
(Bond valuation) The 11?-year ?$1,000 par bonds of Vail Inc. pay 11 percent interest. The? market's required yield to maturity on a? comparable-risk bond is 7 percent. The current market price for the bond is $1,140.
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?
a. What is your yield to maturity on the Vail bonds given the current market price of the? bonds?
______?% ? (Round to two decimal? places.)
a. | |||||||||||||||
Bonds Yield to maturity | = | =rate(nper,pmt,pv,fv) | Where, | ||||||||||||
= | =rate(11,110,-1140,1000) | nper | life | 11 | |||||||||||
= | 8.95% | pmt | Coupon payment | $ 1,000 | x | 11% | = | $ 110 | |||||||
pv | Current Price | $ -1,140 | |||||||||||||
fv | Face Value | $ 1,000 | |||||||||||||
b. | |||||||||||||||
Price of bond | $1,299.95 | ||||||||||||||
Working: | |||||||||||||||
Price of bond is the present value of cash flow from bond. | |||||||||||||||
At 7% market required return; | |||||||||||||||
Year | Cash flow | Discount factor | Present Value | ||||||||||||
1-14 | $ 110 | 7.4987 | $ 824.85 | ||||||||||||
14 | $ 1,000 | 0.4751 | $ 475.09 | ||||||||||||
Current Price | $ 1,299.95 | ||||||||||||||
Working: | |||||||||||||||
Present Value of annuity of 1 | = | (1-(1+i)^-n)/i | Where, | ||||||||||||
= | (1-(1+0.07)^-11)/0.07 | i | 7% | ||||||||||||
= | 7.4987 | n | 11 | ||||||||||||
Present Value of 1 | = | 1.07^-11 | |||||||||||||
= | 0.4751 | ||||||||||||||
c. | |||||||||||||||
Yes | |||||||||||||||
Based on Market required return, price of Bond($1,299.95) is higher than price of bonds of company ($ 1140) . | |||||||||||||||
It means Vail Inc.'s Bonds are underpriced and it it best time to investment in the bonds of company as cost of bond is lower than market cost. | |||||||||||||||