Question

Harrimon Industries bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 10%.

1) What is the yield to maturity at a current market price of $866 ? Round your answer to two decimal places.

_____%

2) $1,153? Round your answer to two decimal places.

_____%

Would you pay $866 for each bond if you thought that a "fair" market interest rate for such bonds was 14%—that is, if rd = 14%?

a) You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.

b) You would buy the bond as long as the yield to maturity at this price equals your required rate of return.

c) You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

d) 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.

e)You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

Answer 1

a.1.Information provided:

Par value= future value= $1,000

Market price= present value= $866

Coupon rate = 10%

Coupon payment = 0.10*$1,000 = $100

Time= 4 years

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

FV= 1,000

PV= -866

PMT = 100

N= 4

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

The value obtained is 14.66.

Therefore, the yield to maturity is 14.66%.

a.2.Information provided:

Par value= future value= $1,000

Market price= present value= $1,153

Coupon rate = 10%

Coupon payment = 0.10*$1,000 = $100

Time= 4 years

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

FV= 1,000

PV= -1,153

PMT = 100

N= 4

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

The value obtained is 5.62.

Therefore, the yield to maturity is 5.62%.

b.Yes, I would buy the bond as the yield to maturity is higher than the required rate of return.

Hence, the answer is option e.