Question
In: Finance
Heyman Company bonds have 4 years left to maturity. Interest is paid annually, and the bonds...
Heyman Company 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 9 percent. a. What is the yield to maturity at a current market price of (1) $829 or (2) $1,104? b. Would you pay $829 for each bond if you thought that a "fair" market interest rate for such bonds was 12 percent--that is, if rd=12 percent? Explain your answer
Present value=
payment=
future value=
annual rate=
periods=
compounding=
Solutions
Expert Solution
a.1.Information provided:
Par value= future value= $1,000
Current price= present value= $829
Time= 4 years
Coupon rate= 9%
Coupon payment= 0.09*1,000= $90
The yield to maturity is calculated by entering the below in a financial calculator:
FV= 1,000
PV= -829
N= 4
PMT= 90
Press the CPT key and I/Y to compute the yield to maturity.
The value obtained is 14.9881.
Therefore, the yield to maturity is 14.9881%
14.99%
2. Information provided:
Par value= future value= $1,000
Current price= present value= $1,104
Time= 4 years
Coupon rate= 9%
Coupon payment= 0.09*1,000= $90
The yield to maturity is calculated by entering the below in a financial calculator:
FV= 1,000
PV= -1,104
N= 4
PMT= 90
Press the CPT key and I/Y to compute the yield to maturity.
The value obtained is 5.9987.
Therefore, the yield to maturity is 5.9987%6%
b. I would purchase the bond at a price of $829 since the yield to maturity of 15% is higher than the required rate of return of 12%.
In case of any query, kindly comment on the solution.
jeff jeffy answered 8 months agoRelated Solutions
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