Fingen's 13-year, $1,000 par value bonds pay 9 percent interest annually. The market price of the bonds is $850 and the market's required yield to maturity on a comparable-risk bond is 10 percent.
a. Compute the bond's yield to maturity.
b. Determine the value of the bond to you, given your required rate of return.
c. Should you purchase the bond?
Yield to Maturity (YTM)= 11.250311% calculated using the RATE function of Excel as follows:
Value of the bond at the required YTM of 10%= $ 928.97 calculated using PV function of Excel as follows:
YTM of the bond is 11.25%, higher that the market expectation of 10%
As a result, current price of $850 is lower than the intrinsic value of $928.97.
Hence we shall purchase the bond.