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. $1,234? 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 is greater than your required rate of return.
   2. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
   3. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
   4. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   5. 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.
   
   
   -Select-IIIIIIIVV

Answer 1

(a)(1)-Yield to Maturity of the Bond if the Current Market price is $823

The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Face Value [$1,000]	FV	1,000
Coupon Amount [$1,000 x 10%]	PMT	100
Yield to Maturity [YTM]	1/Y	?
Time to Maturity [6 Years]	N	6
Bond Price [-$823]	PV	-823

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 yield to maturity (YTM) on the bond = 14.63%

“Yield to Maturity of the Bond if the Current Market price is $823 = 14.63%”

(a)(2)-Yield to Maturity of the Bond if the Current Market price is $1,234

Variables	Financial Calculator Keys	Figure
Face Value [$1,000]	FV	1,000
Coupon Amount [$1,000 x 10%]	PMT	100
Yield to Maturity [YTM]	1/Y	?
Time to Maturity [6 Years]	N	6
Bond Price [-$1,234]	PV	-1,234

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 yield to maturity (YTM) on the bond = 5.34%

“Yield to Maturity of the Bond if the Current Market price is $1,234 = 5.34%”

(b)-DECISION

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