Question

The Saleemi​ Corporation's ​$1000 bonds pay 9 percent interest annually and have 11 years until maturity. You can purchase the bond for ​$925.

a.  What is the yield to maturity on this​ bond? (round to 2 decimal points)

b.  Should you purchase the bond if the yield to maturity on a​ comparable-risk bond is 9 ​percent?

Answer 1

a

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =11

925 =∑ [(9*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^11

k=1

YTM% = 10,2

Using Calculator: press buttons "2ND"+"FV" then assign

PV =-925

PMT = Par value * coupon %=1000*9/(100)

N =11

FV =1000

CPT I/Y

Using Excel

=RATE(nper,pmt,pv,fv,type,guess)

=RATE(11,-9*1000/(100),925,-1000,,)

b

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =11

Bond Price =∑ [(9*1000/100)/(1 + 9/100)^k]     +   1000/(1 + 9/100)^11

k=1

Bond Price = 1000

Using Calculator: press buttons "2ND"+"FV" then assign

PMT = Par value * coupon %=1000*9/(100)

I/Y =9

N =11

FV =1000

CPT PV

Using Excel

=PV(rate,nper,pmt,FV,type)

=PV(9/(100),11,-9*1000/(100),-1000,)

Buy as current price is lesser than intrinsic price at 9%