Question

(Related to Checkpoint 9.2 and Checkpoint​ 9.3)  ​(Bond valuation​ relationships) The 12​-year, ​$1 comma 000 par value bonds of Waco Industries pay 7 percent interest annually. The market price of the bond is ​$1 comma 085​, and the​ market's required yield to maturity on a​ comparable-risk bond is 4 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? a.  What is your yield to maturity on the Waco bonds given the current market price of the​ bonds? nothing​% ​ (Round to two decimal​ places.)

Answer 1

(a)-The Yield to maturity of (YTM) of the Bond

• The Yield to maturity of (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
• The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
• The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 7.00%]	PMT	70
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [12 Years]	N	12
Bond Price [-$1,080]	PV	-1,080

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the annual yield to maturity (YTM) on the bond = 5.99%.

“Hence, the Yield to maturity of (YTM) of the Bond will be 5.99%”

(b)-The value of the Bond at market's required yield to maturity on a​ comparable-risk bond rate of 4.00%.

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 7.00%]	PMT	70
Market Interest Rate or Yield to maturity on the Bond [4.00%]	1/Y	4.00
Maturity Period/Time to Maturity [12 Years]	N	12
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,281.55.

“Hence, the Price of the Bond will be $1,281.55”

(c)-Decision

“NO”. We should not purchase the bond, since the bond is trading at a premium price of $1,281.55 per Bond.