The 14-year, $1,000 per value bonds of Waco industries pay 12 percent interest a
ID: 2745559 • Letter: T
Question
The 14-year, $1,000 per value bonds of Waco industries pay 12 percent interest annually. The market price of the bond is $ 955. and the market's required yield to maturity on a comparable-risk bond in 14 percent. Compute the bond's yield to maturity. Determine the value of the bond to you given the market's required yield to maturity on a comparable-risk bond. Should you purchase the bond? What is your yield to maturity on the Waco bonds given the current market price of the bonds? What should be the value of the Waco bonds given the market's required yield to maturity on a comparable-risk bond?Explanation / Answer
1) Calculation of Yield to maturity :
YTM = (Coupon payment + (face value - Current price)/No.of years) / ((face value + current price)/2)
= (120 + (1000 - 955) /14) / ((1000+955)/2)
= (120+3.2143) / 977.5
= 123.2143 / 977.50
= 12.61%
2) Calculation of Bonds price at market YTM of 14% :
Bonds price = Coupon payment*((1-(1/(1+ytm)n) / YTM + (Face value / (1+ytm)n)
= 120 * ((1 - (1/(1.14)14) / 0.14) + 1000 / (1.14)14
= 120*((1 - 1/6.261349) / 0.14) + 1000 / 6.261349
= (120*0.84029 / 0.14) + 159.71
= 720.25 + 159.71
= $879.96 or $880
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