In: Finance
7) Part 1. (Bond valuation)Fingen's 19?year, ?$1,000 par value bonds pay 13 percent interest annually. The market price of the bonds is ?$1,100 and the? market's required yield to maturity on a? comparablerisk bond is 10 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?
Part 2. (Yield to? maturity) Abner? Corporation's bonds mature in 19 years and pay 11 percent interest annually. If you purchase the bonds for ?$850?, what is your yield to? maturity? (Round to two decimal? places.)
A.
Yield to maturity is the rate of return the investor will get if he/she hold the bold till maturity period
So YTM is like internal rate of return, if we discount all the cash inflow from the bond using YTM, the present value will be equal to the bond current price.
YTM is calculated using Excel, the function used is (IRR)
Pls refer below table
Year 
Cash flow 
Amount 
0 
Bod price (Outflow) 
1100 
1 
Coupon (Inflow) 
130 
2 
Coupon (Inflow) 
130 
3 
Coupon (Inflow) 
130 
4 
Coupon (Inflow) 
130 
5 
Coupon (Inflow) 
130 
6 
Coupon (Inflow) 
130 
7 
Coupon (Inflow) 
130 
8 
Coupon (Inflow) 
130 
9 
Coupon (Inflow) 
130 
10 
Coupon (Inflow) 
130 
11 
Coupon (Inflow) 
130 
12 
Coupon (Inflow) 
130 
13 
Coupon (Inflow) 
130 
14 
Coupon (Inflow) 
130 
15 
Coupon (Inflow) 
130 
16 
Coupon (Inflow) 
130 
17 
Coupon (Inflow) 
130 
18 
Coupon (Inflow) 
130 
19 
Par + Coupon (Inflow 
1130 
YTM 
11.67% 

Formula 
=IRR(G44:G64) 
YTM = 8.19 %
B.
Price of the bond could be calculated using below formula.
P = C* [{1  (1 + YTM) ^ n}/ (YTM)] + [F/ (1 + YTM) ^ n]
Where,
Face value = $1000
Coupon rate = 13%
YTM or Required rate = 10%
Time to maturity (n) = 19 years
Annual coupon C = $130
Let's put all the values in the formula to find the bond current value
P = 130* [{1  (1 + 0.1) ^ 19}/ (0.1)] + [1000/ (1 + 0.1) ^19]
P = 130* [{1  (1.1) ^ 19}/ (0.1)] + [1000/ (1.1) ^19]
P = 130* [{1  0.16351}/ 0.1] + [1000/ 6.11591]
P = 130* [0.83649/ 0.1] + [163.50797]
P = 130* 8.3649 + 163.50797
P = 1087.437 + 163.50797
P = 1250.94497
So price of the bond is $1250.94
C.
Yes, bond should be sell because it is overvalued, and the price will decrease in future

Feel free to comment if you need further assistance J
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