Question

1. (Bond valuation​ relationships)The 14​-year, $1,000 par value bonds of Waco Industries pay 11 percent interest annually. The market price of the bond is $1,115​, and the​ market's required yield to maturity on a​ comparable-risk bond is 8 percent.

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?

1) What is your yield to maturity on the Waco bonds given the current market price of the​ bonds?__% (Round to two decimal​ places.)

-->You should OR should not purchase the Waco bonds at the current market price because they are currently overpriced OR underpriced?

7). (Inflation and interest rates​) What would you expect the nominal rate of interest to be if the real rate is 4.4 percent and the expected inflation rate is 7.2 percent?

The nominal rate of interest would be___% (Round to two decimal​ places.)

Answer 1

A	B	C	D	E	F	G	H	I	J	K	L
2
3		a)
4
5		Calculation of Yield to maturity at Price of $1,115:
6		Face value	$1,000
7		Coupon rate	11.00%
8		Current Price	$1,115
9		Years to Maturity	14	years
10		Annual Coupon	110	=D4*D5
11		Cash flow to investor will be as follows:
12		Year	0	1	2	3	4	5	14
13		Cash flow	($1,115)	$110	$110	$110	$110	$110	$1,110
14
15		Yield to maturity is the rate at which if future NPV to Investor will be zero.
16
17		Rate(nper,pmt,PV, [fv],type) function of excel can be used to find the yield to maturity as follows:
18		NPER	14
19		PMT	$110
20		PV	($1,115.00)
21		FV	$1,000
22
23		Yield to maturity	9.48%	=RATE(D18,D19,D20,D21)
24
25		Thus yield to maturity is	9.48%
26
27		b)
28
29		Par value (F)	$1,000
30		Interest rate (Coupon rate)	11.00%
31		YTM	8.00%
32		Time to maturity	14	Years
33
34		Interest is paid once a year i.e. annual.
35		Annual coupon (C)	$110.00
36		Annual Period (n)	14
37		YTM (i)	8.00%
38		Current Value of the bond can be calculated by finding the present value of cash flows of bonds.
39		Cash Flow of Bonds can be written as follows:
40		Period	0	1	2	3	4	…	14
41		Cash Flow of Bonds		$110.00	$110.00	$110.00	$110.00	$110.00	$1,110.00
42
43		Current Value of Bond	=C*(P/A,i,n)+F*(P/F,i,n)
44		Where, C is coupon, F is par value of bond, i is market rate and n is total number of periods.
45
46		Current Value of Bond	=C*(P/A,i,n)+F*(P/F,i,n)
47			$1,247.33	=D10*PV(D12,D11,-1,0)+D4*(1/((1+D12)^D11))
48
49		Hence current market value of bond is	$1,247.33
50
51		Price of the bond can also be calculated by finding the present value of cash flows of the bond using PV formula of excel as follows:
52		RATE	8.00%
53		NPER	14
54		PMT	$110.00
55		FV	$1,000
56		Price of the Bond	$1,247.33	=-PV(D27,D28,D29,D30)
57
58		Hence Market Value of Bond is	$1,247.33
59
60		C)
61
62		Since the market value of the bond is higher than the bond price,
63		therefore the bond is selling cheaper.
64		Hence the bond should be purchased.
65