. Your boss has indicated that he would like your help in determining the value

Question

. Your boss has indicated that he would like your help in determining the value of a bond issue currently under review. The firm has bonds outstanding that have four (04) years remaining to maturity, a coupon interest rate of 9 percent paid annually, and a $1,000 par value.

      a. What is the yield to maturity on the bond issue if the current market price is $829?           

      b. What is the yield to maturity on the bond issue if the current market price is $1,104?           

    c. Would you be willing to buy one of these bonds for $829 if you required a 12 percent rate of return

     on the bonds issue? Explain your answer.

Explanation / Answer

a. Current price = $829. par value = $1,000. coupon rate = 9% time = 4 years

Thus yield to maturity (YTM) will make the PV of future interest payouts for 4 years and PV of maturity value equal to 829

Table below shows the basic sheet used while calculating the YTM:

Now using the trial and errorapproach, i change values in the YTM column (r) to make the Total PV value 829. we get r as 15%. This is the YTM. This can also be calculated by using the solver in excel

b. When bond price is $1,104 (again the same process as in a above)

So YTM is 6%

c. YTM at $829 is 15%. This is greater than 12% required rate of return. So i will be willing to buy the bond.

Year Par value Interest rate Interest amount YTM rate PV of interest rate 1 1,000 0.09 90 r #VALUE! 2 1,000 0.09 90 r #VALUE! 3 1,000 0.09 90 r #VALUE! 4 1,000 0.09 90 r #VALUE! PV of maturity amount #VALUE! Total PV #VALUE!

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.