Question

Harrimon Industries bonds have 6 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.

A)

What is the yield to maturity at a current market price of

$839? Round your answer to two decimal places. (%)

  

$1,152? Round your answer to two decimal places. (%)
  

Would you pay $839 for each bond if you thought that a "fair" market interest rate for such bonds was 12%-that is, if rd = 12%?

I:You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
II:You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
III:You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond.
IV:You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
V: You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.

Answer 1

FV = $1000

N = 6 YEARS

PMT = $90

PV = $839

I/Y = 13.03%

PV = $ 1152

I/Y = 5.91%

THE BOND IS BEING OFFERED AT A DISCOUNT.  

the correct answer is option I.

WE WOULD BUY THE BOND WHICH WILL GIVE US A RETURN WHICH IS ATLEAST EQUAL TO THE REQUIRED RETURN.

PAYING $839 WE WILL GET A RETURN OF 13.03% WHICH IS MORE THAN THE REQUIRED RATE OF RETURN OF 12% SO WE WOULD BE WILLING TO PAY $858 OR EVEN MORE ON THIS BOND. PAYING $1152 WILL GIVE US A RETURN OF 5.91% WHICH IS VERY LESS THAN THE REQUIRED RATE OF RETURN SO WE WOULD NOT BUY THIS BOND AS IT IS NOT GIVING US THE REQUIRED RATE OF RETURN ALSO.

IF OUR REQUIRED RATE OF RETURN IS 13.03 ,I WILL NOT PAY MORE THAN 4$839 TO ACQUIRE THIS BOND.

IF MY REQUIRED RATE OF RETURN IS 5.9,1 I WILL NOT PAY MORE THAN $1152 FOR THIS BOND.

BUT AS PER PROBLEM THE REQUIRED RATE IS 12% BUYIND THE BOND AT $839, I CAN GET A RETURN OF 12% AND EVEN MORE ,SO IN THIS CASE I CAN PAY $839 OR MORE TO PURCHASE THIS BOND. SO ATLEAST IF THE REQUIRED RETURN = YTM, I WILL BUY THE BOND SO OPTION I IS CORRECT.