Question

Harrimon Industries bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 8%.

A)What is the yield to maturity at a current market price of:

1) $808? Round your answer to two decimal places.

_____%

2) $1,065? Round your answer to two decimal places.

_____%

B) Would you pay $808 for each bond if you thought that a "fair" market interest rate for such bonds was 14%-that is, if rd = 14%? (select one of the following)

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

II. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.

III. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

IV. 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.

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

Answer 1

(a)(1)-Yield to Maturity of the Bond if the Current Market price is $808

• The Yield to maturity of (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
• The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
• 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
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 8.00%]	PMT	80
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [4 Years]	N	4
Bond Price/Current Market Price of the Bond [-$808]	PV	-808

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 semi-annual yield to maturity (1/Y) on the bond = 14.68%.

“Yield to Maturity of the Bond if the Current Market price is $808 = 14.68%”

(a)(2)-Yield to Maturity of the Bond if the Current Market price is $1,065

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 8.00%]	PMT	80
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [4 Years]	N	4
Bond Price/Current Market Price of the Bond [-$1,065]	PV	-1,065

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 = 6.12%.

“Yield to Maturity of the Bond if the Current Market price is $1,065 = 6.12%”

(b)-DECISION

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