(Related to Checkpoint 9.2 and Checkpoint 9.3) (Bond valuation) The Il-year $1.0
ID: 2710754 • Letter: #
Question
(Related to Checkpoint 9.2 and Checkpoint 9.3) (Bond valuation) The Il-year $1.000 par bonds of Vail Inc. pay 9 percent interest. The markers required yield to maturity on a comparable-risk bond is 10 percent. The current market price for the bond is $850. a. Determine the yield to maturity. b. What is the value of the bonds to you given the yield to maturity on a comparable-risk bond? c. Should you purchase the bond at the current market price? a. What is your yield to maturity on the Vail bonds given the current market price of the bonds? b. What should be the value of the Vail bonds given the yield to maturity on a comparable risk bond?Explanation / Answer
A. Yield to maturity (YTM), is the interest rate by which the present values of all the future cash flows are equal to the bond's price here $ 850.
We must know, how to calucalte the Annuity interest rate:
Here if you see 11.60 is the interest rate where market price equal to the Present value of cash flow from bond, hence 11.60 % is yield to maturity.
Interest Rate
0.1160
Year
$
1
1
90
0.90
80.65
2
90
0.80
72.26
3
90
0.72
64.75
4
90
0.64
58.02
5
90
0.58
51.99
6
90
0.52
46.59
7
90
0.46
41.74
8
90
0.42
37.40
9
90
0.37
33.52
10
90
0.33
30.03
10
1000
0.33
333.70
TOTAL
850.66
B: Value of bond at given yield to maturity is $ 938 .
938.55
C. As YTM 11.60 % > Mater Rate 10% is it advisable to purchase the Bond.
Interest Rate
0.1160
Year
$
1
1
90
0.90
80.65
2
90
0.80
72.26
3
90
0.72
64.75
4
90
0.64
58.02
5
90
0.58
51.99
6
90
0.52
46.59
7
90
0.46
41.74
8
90
0.42
37.40
9
90
0.37
33.52
10
90
0.33
30.03
10
1000
0.33
333.70
TOTAL
850.66
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