In: Accounting
10/12 P9-16 (similar to) (Related to Checkpoint 9.2) (Yield to maturity) The Saleemi Corporation's $1 comma 000 bonds pay 11 percent interest annually and have 13 years until maturity. You can purchase the bond for $915. a. What is the yield to maturity on this bond? b. Should you purchase the bond if the yield to maturity on a comparable-risk bond is 14 percent? a. The yield to maturity on the Saleemi bonds is nothing%. (Round to two decimal places.)
(a)-The Yield to maturity of (YTM) of the Bond
Variables |
Financial Calculator Keys |
Figure |
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
Coupon Amount [$1,000 x 11.00%] |
PMT |
110 |
Market Interest Rate or Yield to maturity on the Bond |
1/Y |
? |
Maturity Period/Time to Maturity [13 Years] |
N |
13 |
Bond Price [-$915] |
PV |
-915 |
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 = 12.35%.
“Hence, the Yield to maturity of (YTM) of the Bond will be 12.35%”
(b)-The value of the Bond at market's required yield to maturity on a comparable-risk bond rate of 14.00%
Variables |
Financial Calculator Keys |
Figures |
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
Coupon Amount [$1,000 x 11.00%] |
PMT |
110 |
Market Interest Rate or Yield to maturity on the Bond [14.00%] |
1/Y |
14 |
Maturity Period/Time to Maturity [13 Years] |
N |
13 |
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) = $824.73.
“Hence, the Value of the Bond will be $824.73”
(c)-Decision
“YES”. We should purchase the bond, since the bond is trading at a discount price of $824.73.