Question

The 12​-year ​$1000 par bonds of Vail Inc. pay 13 percent interest. The​ market's required yield to maturity on a​ comparable-risk bond is 12 percent. The current market price for the bond is $ 1140.

a.  Determine the yield to maturity.

b.  What is the value of the bonds to you given the yield to maturity on a​ comparable-risk bond?

c.  Should you purchase the bond at the current market​ price?

Answer 1

a.

Yield to maturity

10.86%

Working:

Yield to maturity is the yield an investor earns if they hold investment till its maturity.

Number of period

nper

12

Face Value

fv

$ 1,000.00

Coupon Interest payment

pmt

$     130.00

(1000*13%)

Current Price of Bond

pv

$ 1,140.00

Yield to maturity

=

=rate(nper,pmt,-pv,fv)

=

10.86%

b.

Value of bond on the comparable risk bonds yield to maturity is

$ 1,061.94

Working:

Price

=

=-pv(rate,nper,pmt,fv)

=

$ 1,061.94

rate

12%

nper

12

pmt

$     130.00

fv

$ 1,000.00

c.

No

Notes:

The current market price for the bond is $ 1140.But, value of comparable risk bond in the market is $ 1,061.94.

So, it is clear that such bond is overpriced and it is not good to buy such overpriced bond.