Question

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=

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Answer 1

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%.

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