Question

11) Part 1. ?(Bond valuation? relationships) The 14?-year, ?$1000 par value bonds of Waco Industries pay 7 percent interest annually. The market price of the bond is ?$945?, and the? market's required yield to maturity on a? comparable-risk bond is 9 percent. (Round to two decimal? places.)
a. Compute the? bond's yield to maturity.
b. Determine the value of the bond to you given the? market's required yield to maturity on a? comparable-risk bond.
c. Should you purchase the? bond?

part two) (Yield to? maturity) The Saleemi? Corporation's ?$1000 bonds pay 11 percent interest annually and have 11 years until maturity. You can purchase the bond for ?$855.

a. What is the yield to maturity on this? bond?
b. Should you purchase the bond if the yield to maturity on a? comparable-risk bond is 12 ?percent?

Answer 1

Answer to Part 1:

Answer a:

Par Value = $1,000
Annual Coupon = 7%*$1,000 = $70
Current Price = $945
Time to Maturity = 14 years

Let annual YTM be i%

$945 = $70 * PVIFA(i%, 14) + $1,000 * PVIF(I%, 14)

Using financial calculator:
N = 14
PV = -945
PMT = 70
FV = 1000

I = 7.65%

Annual YTM = 7.65%

Answer b:

Par Value = $1,000
Annual Coupon = $70
Time to Maturity = 14 years
Comparable Market Yield = 9%

Price of Bond = $70 * PVIFA(9%, 14) + $1,000 * PVIF(9%, 14)
Price of Bond = $70 * (1 - (1/1.09)^14) / 0.09 + $1,000 / 1.09^14
Price of Bond = $844.28

Answer c:

Current Market Price is higher than expected price. So, we should not purchase this bond

Answer to Part 2:

Answer a:

Par Value = $1,000
Annual Coupon = 11%*$1,000 = $110
Current Price = $855
Time to Maturity = 11 years

Let annual YTM be i%

$855 = $110 * PVIFA(i%, 11) + $1,000 * PVIF(I%, 11)

Using financial calculator:
N = 11
PV = -855
PMT = 110
FV = 1000

I = 13.62%

Annual YTM = 13.62%

Answer b:

YTM Comparable-risk bond is 12% which is lower than that of this bond. So, we should purchase this bond.