?(Related to Checkpoint 9.2 and Checkpoint? 9.3)???(Bond valuation? relationship

Question

?(Related to Checkpoint 9.2 and Checkpoint? 9.3)???(Bond valuation? relationships) The 19?-year, ?$1000 par value bonds of Waco Industries pay 11 percent interest annually. The market price of the bond is ?$1055?, and the? market's required yield to maturity on a? comparable-risk bond is 9 percent.

a.Compute the? bond's yield to maturity. answer in percentage

b.Determine the value of the bond to you given the? market's required yield to maturity on a? comparable-risk bond.

c.Should you purchase the? bond?

Explanation / Answer

Requirement (a) - Yield To Maturity in percentage

Yield To Maturity [YTM] = Coupon Amount + [(Face Value – Bond Price) / Maturity Years] / [(Face Value + Bond Price)/2]

= $110 + [($1,000 - $1,055) / 19)] / [($1,000 + $1,055) / 2]

= [($110 – 2.8947) / $1,027.50] x 100

= 10.33%

Requirement (b) - Value of the bonds at yield to maturity on a comparable-risk bond

Par Value of the bond    = $1,000

Coupon Amount           = $110 [$1,000 x 11%]

Yield to Maturity                    = 9%

Maturity Period             = 19 Years

Value of the Bond = Present Value of the Coupon Payments + Present Value of the Par Value

= $110 [PVIFA 9%, 19 Years] + $1,000[PVIF 9%, 19 Years]

= [$110 x 8.9501147] + [$1,000 x 0.19448967]

= $984.51 + 194.49

= $1,179

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