Question

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? comparable-risk 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.)

Answer 1

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

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