Question

​(Related to Checkpoint 9.2 and Checkpoint​ 9.3)  ​(Bond valuation)  ​Fingen's 14​-year, ​$1,000par value bonds pay 15 percent interest annually. The market price of the bonds is $940and the​ market's required yield to maturity on a​ comparable-risk bond is 18 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?

Answer 1

a

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =14

940 =∑ [(15*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^14

k=1

YTM% = 16.1

b

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =14

Bond Price =∑ [(15*1000/100)/(1 + 18/100)^k]     +   1000/(1 + 18/100)^14

k=1

Bond Price = 849.76

c

Do not buy as bond price of 940 is more than your expected price of 849.76