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 9%.

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

1. $846? Round your answer to two decimal places. ___%

2. $1,102? Round your answer to two decimal places. ___%

b. Would you pay $846 for each bond if you thought that a "fair" market interest rate for such bonds was 13%—that is, if rd = 13%?

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

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

C. 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.

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

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

-Select-

Answer 1

a)

No of periods = 4 years

Coupon per period = (Coupon rate / No of coupon payments per year) * Face value

Coupon per period = (9% / 1) * $1000

Coupon per period = $90

When Bond price = $846

Bond Price = Coupon / (1 + YTM)^period + Face value / (1 + YTM)^period

$846 = $90 / (1 + YTM)¹ + $90 / (1 + YTM)² + ...+ $90 / (1 + YTM)⁴ + $1000 / (1 + YTM)⁴

Using Texas Instruments BA 2 plus calculator

SET N = 4, PMT = 90, FV = 1000, PV = -846

CPT --> I/Y = 14.32

YTM = 14.32%

When Bond price = $1102

Bond Price = Coupon / (1 + YTM)^period + Face value / (1 + YTM)^period

$1102 = $90 / (1 + YTM)¹ + $90 / (1 + YTM)² + ...+ $90 / (1 + YTM)⁴ + $1000 / (1 + YTM)⁴

Using Texas Instruments BA 2 plus calculator

SET N = 4, PMT = 90, FV = 1000, PV = -1102

CPT --> I/Y = 6.0528

YTM = 6.05%

b)

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

The YTM = 14.32% at $846 which is greater than the required rate of 13%.