Question

Harrimon Industries bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.

1. What is the yield to maturity at a current market price of
   
   1. $853? Round your answer to two decimal places.
          %
      
   2. $1,108? Round your answer to two decimal places.
          %
      
2. Would you pay $853 for each bond if you thought that a "fair" market interest rate for such bonds was 13%-that is, if r_d = 13%?
   
   1. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   2. You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond.
   3. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   4. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
   5. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
   
   
   -Select-IIIIIIIVVItem 3

Answer 1

a)	Par/Face value	1000
	coupon rate	0.09
	annual coupon	90
	Time to maturity	4 years
1)	Present Value = Future value/ ((1+r)^t)
	where r is the yield to maturity and t is the time period in years.
	price of bond = sum of present values of future cash flows
	price of bond = 853.
	Find r using excel
	r	0.1400
	t	1	2	3	4
	future cash flow	90	90	90	1090
	present value	78.95	69.25	60.75	645.37
	price/sum of present values	854.31
	The yield to maturity is 14.00%.
2)	Present Value = Future value/ ((1+r)^t)
	where r is the yield to maturity and t is the time period in years.
	price of bond = sum of present values of future cash flows
	price of bond = 1108.
	Find r using excel
	r	0.0590
	t	1	2	3	4
	future cash flow	90	90	90	1090
	present value	84.99	80.25	75.78	866.65
	price/sum of present values	1108
	The yield to maturity is 5.90%.
b)	Present Value = Future value/ ((1+r)^t)
	where r is the yield to maturity and t is the time period in years.
	price of bond = sum of present values of future cash flows
	r	0.1300
	t	1	2	3	4
	future cash flow	90	90	90	1090
	present value	79.65	70.48	62.37	668.52
	price/sum of present values	881
	The fair market value of the bonds when the yield to maturity is 13% is 881.
	If you can buy the bonds at 853, you would buy them because you would be getting them at a
	discount.
	V. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.