Question

In: Finance

 ​Fingen's 13​-year, ​$1,000 par value bonds pay 9 percent interest annually. The market price of the...

 ​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?

Solutions

Expert Solution

Part (a):

Yield to Maturity (YTM)= 11.250311% calculated using the RATE function of Excel as follows:

Part (b):

Value of the bond at the required YTM of 10%= $ 928.97 calculated using PV function of Excel as follows:

Part (c):

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.

jeff jeffy answered 1 year ago
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