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

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 10 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

Yielld to maturity of Bond 1

Face value =$ 1000 Market value =$ 829 Coupon Rate =10% years to maturity =4

formula = YTM= C+(FV -MV/n)Fv+Mv/2

   100+(1000-829/4)/1000+829/2

   100+42.75/914.50= 142.75/914.50=0.1561 or 15.61

YTM of 2 nd Bond = FV=$ 1000 MV=$ 1104 Coupon =10% years to maturity=4

   100+(1000-1104)4/1000+1104/2

   100+(-52)/1052 => 48/1052 => 0.0456 or 4.56%

at 12% required rate the value of the Bond

V= I/Kd I= coupon payment = (1000*10%) =$ 100 Kd=12% or 0.12

   100/0.12=833.33

yet 12% requird rate the value of the bond =$ 833.33

but the bond is available for $ 829 it is cheaper YES can buy the bond

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