In: Finance
The 12year, $1,000 par value bonds of Smith Industries pay 7 percent interest annually. The market price of the bond is $885, and the market’s required yield to maturity on a comparablerisk bond is 10 percent.
What is your yield to maturity on the Smith bonds given the current market price of the bonds? Round to two decimal places.
What should be the value of the Smith bonds given the market's required yield to maturity on acomparablerisk bond? Round to the nearest cent.
You should or should not purchase the Smith bonds at the current market price because they are currently under or overpriced. Please select one of each.
(a)The Yield to maturity of (YTM) of the Bond
Variables 
Financial Calculator Keys 
Figure 
Par Value/Face Value of the Bond [$1,000] 
FV 
1,000 
Coupon Amount [$1,000 x 7.00%] 
PMT 
70 
Market Interest Rate or Yield to maturity on the Bond 
1/Y 

Maturity Period/Time to Maturity [12 Years] 
N 
12 
Bond Price/Current Market Price of the Bond [$885] 
PV 
885 
We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the annual yield to maturity (YTM) on the bond = 8.57%.
“Hence, the Yield to maturity of (YTM) of the Bond will be 8.57%”
(b)The value of the Bond at market's required yield to maturity on a comparablerisk bond rate of 10.00%.
Variables 
Financial Calculator Keys 
Figure 
Par Value/Face Value of the Bond [$1,000] 
FV 
1,000 
Coupon Amount [$1,000 x 7.00%] 
PMT 
70 
Market Interest Rate or Yield to maturity on the Bond [10.00%] 
1/Y 
10 
Maturity Period/Time to Maturity [12 Years] 
N 
12 
Bond Price/Current Market Price of the Bond 
PV 
? 
Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $795.59.
“Hence, the Price of the Bond will be $795.59”
(c)Decision
You “SHOULD” purchase the Smith bonds at the current market price because they are currently “UNDERPRICED”.