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ID: 2616734 • Letter: O
Question
o Click here to read the eBook: Bond Yields Click here to read the eBook: Bonds with YIELD TO MATURITY o I Hammon 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%. O 16 a. What is the yield to maturity at a current market price of 1. $8357 Round your answer to two decimal places. 2. $1,0707 Round your answer to two decimal places. b. would you pay $835 for each bond if you thought that a "fair" market interest rate for such bonds was 13%-that is, if re-13%? 1. You would buy the bond as long as the yield to maturity at this price equals your required rate of return. Il. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate III. You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on IV. You would buy the bond as long as the yieid to maturity at this price is greater than your required rate of return. V. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return. of return Check My Work (3 2 YUExplanation / Answer
a.
1) 13.62%
Using financial calculator BA II Plus - Input details:
@ $835
FV = Future Value =
$1,000
PV = Present Value =
-$835
N = Total number of payment periods =
4
PMT = Payment =
$80
CPT > I/Y = Rate =
13.62
Convert Yield in annual and percentage form = Yield x 100
13.62%
2) 5.98%
Using financial calculator BA II Plus - Input details:
@ $1,070
FV = Future Value =
$1,000
PV = Present Value =
-$1,070
N = Total number of payment periods =
4
PMT = Payment =
$80
CPT > I/Y = Rate =
5.98
Convert Yield in annual and percentage form = Yield x 100
5.98%
b.
Correct option is > IV. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return
As yield to maturity discount at higher rate and makes bond cheaper. Hence, @ 13.62% the price of bond will be $835 and @13% bond price will be $851.28. This concludes that bond is cheap and you should buy.
Using financial calculator BA II Plus - Input details:
@ $835
FV = Future Value =
$1,000
PV = Present Value =
-$835
N = Total number of payment periods =
4
PMT = Payment =
$80
CPT > I/Y = Rate =
13.62
Convert Yield in annual and percentage form = Yield x 100
13.62%
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