Question

YIELD TO MATURITY

Harrimon Industries bonds have 6 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.

a) What is the yield to maturity at a current market price of

1. $812? Round your answer to two decimal places. %

2. $1,147? Round your answer to two decimal places. %

b) Would you pay $812 for each bond if you thought that a "fair" market interest rate for such bonds was 13%-that is, if rd = 13%?

1.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.

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

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

4. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.

5. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

Answer 1

a.1.Information provided:

Par value= future value= $1,000

Market price= present value= $812

Coupon rate = 9%

Coupon payment = 0.08*$1,000 = $90

Time= 6 years

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -812

PMT = 90

N= 6

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 13.81.

Therefore, the yield to maturity is 13.81%.

a.2.Information provided:

Par value= future value= $1,000

Market price= present value= $1,147

Coupon rate = 9%

Coupon payment = 0.08*$1,000 = $90

Time= 6 years

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -1,147

PMT = 90

N= 6

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 6.0097.

Therefore, the yield to maturity is 6.01%.

b.Yes, I would buy the bond as the yield to maturity is higher than the required rate of return.

Hence, the answer is option 2.

In case of any query, kindly comment on the solution.