Question

Harrimon Industries bonds have 6 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 10%.

1. What is the yield to maturity at a current market price of
   
   1. $823? Round your answer to two decimal places.
         %_____
      
   2. $1,200? Round your answer to two decimal places.
         %_____
      
2. Would you pay $823 for each bond if you thought that a "fair" market interest rate for such bonds was 14%-that is, if r_d = 14%?
   
   1. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
   2. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   3. 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.
   4. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   5. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
   
   Answer: I, II, III, IV, V?

Answer 1

a.1.

Calculate the yield to maturity as follows:

Therefore, the yield to maturity is 14.63%.

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a.2.

Calculate the yield to maturity as follows:

Therefore, the yield to maturity is 5.94%.

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b.

Correct is Option 4.

You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

As yield to maturity is greater than required return.