Question
In: Finance
Harrimon Industries bonds have 4 years left to maturity. Interest is paid annually, and the bonds...
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%.
A. What is the yield to maturity at a current market price of
- $873? Round your answer to two decimal places.
- $1,133? Round your answer to two decimal places.
B. Would you pay $873 for each bond if you thought that a "fair" market interest rate for such bonds was 13%—that is, if rd = 13%?
Would you pay $873 for each bond if you thought that a "fair" market interest rate for such bonds was 13%—that is, if rd = 13%?
- 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.
- You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
- You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
- You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
- You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
Solutions
Expert Solution
a.1.Information provided:
Par value= future value= $1,000
Time= 4 years
Coupon rate= 10%
Coupon payment= 0.10*1,000= $100
Current price= present value= $873
The yield to maturity is calculated by entering the below in a financial calculator:
FV= 1,000
N= 4
PMT= 100
PV= -873
Press the CPT key and I/Y to compute the yield to maturity.
The value obtained is 14.39.
Therefore, the yield to maturity is 14.39%.
a.2.Information provided:
Par value= future value= $1,000
Time= 4 years
Coupon rate= 10%
Coupon payment= 0.10*1,000= $100
Current price= present value= $1,133
The yield to maturity is calculated by entering the below in a financial calculator:
FV= 1,000
N= 4
PMT= 100
PV= -1,133
Press the CPT key and I/Y to compute the yield to maturity.
The value obtained is 6.15
Therefore, the yield to maturity is 6.15%.
b.I would buy the bond as the yield to maturity at $873 is greater than the required rate of return.
Hence, the answer is option II.
In case of any query, kindly comment on the solution.
jeff jeffy answered 2 years agoRelated Solutions
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YIELD TO MATURITY Harrimon Industries bonds have 4 years left to maturity. Interest is paid annually,...
YIELD TO MATURITY
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Interest is paid annually, and the bonds have a $1,000 par value
and a coupon rate of 8%.
What is the yield to maturity at a current market price
of
$812? Round your answer to two decimal places.
%
$1,066? Round your answer to two decimal places.
%
Would you pay $812 for each bond if you thought that a "fair"
market interest rate for such...
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