Question

In: Finance

1. ABC Company bonds have 5 years remaining to maturity. Interest is paid annually, the bonds...

1. ABC Company bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value and the coupon interest rate is 9%.

i) What is the yield to maturity at a current market price of $829?
ii) What is the yield to maturity at a current market price of $1,104?
iii) If you thought that the appropriate rate of interest was 12% (i.e. Kd=12%), would you buy these bonds? (Both, if one, identify which one, or none) Explain your answer

Expert Solution

a.1.Information provided:

Par value= future value= $1,000

Time= 5 years

Coupon rate= 9%

Coupon payment= 0.10*1,000= $90

Current price= present value= $829

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

N= 5

PMT= 90

PV= -829

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 13.98.

Therefore, the yield to maturity is 13.98%.

a.2.Information provided:

Par value= future value= $1,000

Time= 5 years

Coupon rate= 9%

Coupon payment= 0.10*1,000= $90

Current price= present value= $1,104

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

N= 5

PMT= 90

PV= -1,104

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 6.50.

Therefore, the yield to maturity is 6.50%.

b.I would buy the bond with the current market price of $829 as the yield to maturity is greater than the required rate of return.

In case of any query, kindly comment on the solution.

jeff jeffy answered 2 years ago

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