Question

(Bond valuation)?Fingen's 14?-year, ?$1,000 par value bonds pay 13 percent interest annually. The market price of the bonds is ?$870 and the? market's required yield to maturity on a? comparable-risk bond is 14 percent.

a. Compute the? bond's yield to maturity.

b. Determine the value of the bond to? you, given your required rate of return.

c. Should you purchase the? bond?

a. What is your yield to maturity on the Fingen bonds given the market price of the? bonds?

______?% ?(Round to two decimal? places.)

Answer 1

a.

Bonds Yield to maturity

=

=rate(nper,pmt,pv,fv)

Where,

=

=rate(14,130,-870,1000)

nper

life

14

=

15.30%

pmt

Coupon payment

$           130

pv

Current Price

$         -870

fv

Face Value

$       1,000

b.

Price of bond

$ 939.98

Working:

Price of bond is the present value of cash flow from bond.

At 14% market required return;

Year

Cash flow

Discount factor

Present Value

1-14

$        130

6.002072

$ 780.27

14

$    1,000

0.15971

$ 159.71

Current Price

$ 939.98

Working:

Present Value of annuity of 1

=

(1-(1+i)^-n)/i

Where,

=

(1-(1+0.14)^-14)/0.14

i

14%

=

6.002072

n

14

Present Value of 1

=

1.14^-14

=

0.15971

c.

Yes

Based on Market required return, price of Bond($939.98) is higher than price of bonds of company ($ 870) .

It means Fingen's Bonds are underpriced and it it best time to investment in the bonds of Fingen as cost of bond is lower than market cost.