(Related to Checkpoint 9.2 and Checkpoint 93) (Bond valuation relationships) The
ID: 2710757 • Letter: #
Question
(Related to Checkpoint 9.2 and Checkpoint 93) (Bond valuation relationships) The 16year, $1,000 par value bonds of Waco Industries pay 12 percent interest annually. The market price of the bond is $945, and the markets required yield to maturity on a comparable-risk bond is II percent. a. Compute the bond's yield to maturity. 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? a. What is your yield to maturity on the Waco bonds given the current market price of the bonds? [](Round to two decimal places.) b. What should be the value of the Waco bonds given the markets required yield to maturity on a comparable-risk bond? $ (Round to the nearest cent.) c. You should purchase the Waco bonds at the current market price because they are should not r currently underpriced . (Select from the drop-down menus.) overpricedExplanation / Answer
11. a) Given 16-yr Waco bond, with interest rate of 12%
So, yearly interest = $120 for 16 yrs
Current price = $945
Using the excel formula =RATE(16,120,-945,1000,0), we obtain ytm = 12.825%
b) value of bond given market ytm of 11% is computed by discounting all interest and FV by ytm
or in excel using the formula =PV(11%,16,120,1000,0), we obtain value of bond = $1073.79
c) Since, value of bond is higher than current price
or, since the ytm of the bond is greater than the current ytm in market for similar risk bond,
you should purchase the bond.
12. Nominal interest rate = inflation + real interest rate = 3.8 + 7.3 = 11.1%
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