In: Accounting
11/12 Related to Checkpoint 9.2 and Checkpoint 9.3) (Bond valuation relationships) The 16-year, $1 comma 000 par value bonds of Waco Industries pay 9 percent interest annually. The market price of the bond is $1 comma 145, and the market's required yield to maturity on a comparable-risk bond is 6 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)-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 9.00%] |
PMT |
90 |
Market Interest Rate or Yield to maturity on the Bond |
1/Y |
? |
Maturity Period/Time to Maturity [16 Years] |
N |
16 |
Bond Price [-$1,145] |
PV |
-1,145 |
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 = 7.42%.
“Hence, the Yield to maturity of (YTM) of the Bond will be 7.42%”
(b)-The value of the Bond at market's required yield to maturity on a comparable-risk bond rate of 6.00%
Variables |
Financial Calculator Keys |
Figures |
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
Coupon Amount [$1,000 x 9.00%] |
PMT |
90 |
Market Interest Rate or Yield to maturity on the Bond [6.00%] |
1/Y |
6.00 |
Maturity Period/Time to Maturity [16 Years] |
N |
16 |
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) = $1,303.18.
“Hence, the Value of the Bond will be $1,303.18”
(c)-Decision
“NO”. We should not purchase the bond, since the bond is trading at a premium price of $1,303.18.