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%.

1. What is the yield to maturity at a current market price of
   
   1. $829? Round your answer to two decimal places.
          %
      
   2. $1,108? Round your answer to two decimal places.
          %
      
2. Would you pay $829 for each bond if you thought that a "fair" market interest rate for such bonds was 14%-that is, if r_d = 14%?
   
   1. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
   2. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
   3. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   4. 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.
   5. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

Answer 1

- Face Value of Bond = $1000

Annual Coupon payment = $1000*9% = 90

A-i) Calculating the Yield to Maturity(YTM) when price is $829 using Excel "Rate" function:-

So, YTM is 14.99%

A-ii) Calculating the Yield to Maturity(YTM) when price is $1108 using Excel "Rate" function:-

So, YTM is 5.89%

B). Ans- Option V. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

Your expected fair required return for $829 price bond is 14% while actually the Bond's Yield to maturity is 14.99% which is greater than required return.

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

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