Question

1- Abner​ Corporation's bonds mature in 19 years and pay 8 percent interest annually. If you purchase the bonds for ​$1,075​, what is your yield to​ maturity?

Your yield to maturity on the Abner bonds is _​%. ​(Round to two decimal​ places.)

2- The Saleemi​ Corporation's ​$1,000 bonds pay 9 percent interest annually and have 11 years until maturity. You can purchase the bond for ​$955.

a.What is the yield to maturity on this​ bond?

b.Should you purchase the bond if the yield to maturity on a​ comparable-risk bond is 8 ​percent?

Answer 1

Solution to QUESTION-1

The Yield to maturity on the Abner bond

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 8%]	PMT	80
Yield to Maturity [YTM]	1/Y	?
Time to Maturity [9 Years]	N	9
Bond Price [-$1,075]	PV	-1,075

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 = 6.86%.

“Therefore, the Yield to maturity on the Abner bond will be 6.86%”

Solution to QUESTION-2

(a)- The​ bond's yield to maturity.

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 9%]	PMT	90
Yield to Maturity [YTM]	1/Y	?
Time to Maturity [11 Years]	N	11
Bond Price [-$955]	PV	-955

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 = 9.68%.

“Hence, the yield-to-maturity of the Bond will be 9.68%”

(b)-The value of the Bond at market's required yield to maturity on a​ comparable-risk bond rate of 8%

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the bond = $1,000

Annual Coupon Amount = $90 [$1,000 x 9%]

Annual Yield to Maturity of the Bond = 8%

Maturity Period = 11 Years

The Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $90[PVIFA 8%, 11 Years] + $1,000[PVIF 8%, 11 Years]

= [$90 x 7.13896] + [$1,000 x 0.42888]

= $642.51 + $428.88

= $1,071.39

“Hence, the Value of the Bond will be $1,071.39”

Decision

“NO”. We should not purchase the bond, since the bond is trading at a premium price of $1,071.39.

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.