Todd is contemplating whether to purchase a bond issuance by the city of NY. Tod

Question

Todd is contemplating whether to purchase a bond issuance by the city of
NY.
Todd requires any investment to have at least a 7% return.
The NY bond is a six-year bond ($1000 par value) with a 8% coupon rate with a current market price of $1,100.
The coupon is paid annually. In addition, NY has the potential to call the bond with a call price of $1050 in 4 years

Should Todd purchase the San Francisco bond given his opportunity cost of 7%?

In addition, what is the current yield to maturity on the bond? What is the Yield to Call?




What would be the maximum amount that Todd would be willing to pay for the bond?

Explanation / Answer

price of the bond P = pv(.07,6,80,1000)

$1047.67

hence todd would be willing to pay upto $1047.67 for the given bond,given his required rate of return of 7% hence he should not buy the bond since the current price of the bond is $1100(>$1047.67)

ytm = (80+(1000-1100)/6)/(.4*1000+.6*1100)

5.97%

ytc = (80+(1050-1100)/4)/(0.4*1050+0.6*1100)

6.25%

todd is wiling to pay maximum $1047.67 for the bond..(calculated earlier)

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