Question

Harrimon Industries bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%. a. What is the yield to maturity at a current market price of 1. $845? Round your answer to two decimal places. 2. $1,081? Round your answer to two decimal places. % b. Would you pay $845 for each bond if you thought that a "fair" market interest rate for such bonds was 13%-that is, if ra = 13%? I. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return. II. You would buy the bond as long as the yield to maturity at this price equals your required rate of return. III. You would not buy the bond as long as the yield to ma urity at this price is greater than your required rate of return. IV. You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond. V. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return. -Select-

Answer 1

Answer a.

If current market price is $845:

Face Value = $1,000
Current Price = $845

Annual Coupon Rate = 9%
Annual Coupon = 9% * $1,000
Annual Coupon = $90

Time to Maturity = 4 years

Let annual YTM be i%

$845 = $90 * PVIFA(i%, 4) + $1,000 * PVIF(i%, 4)

Using financial calculator:
N = 4
PV = -845
PMT = 90
FV = 1000

I = 14.36%

Annual YTM = 14.36%

If current market price is $1,081:

Face Value = $1,000
Current Price = $1,081
Annual Coupon = $90
Time to Maturity = 4 years

Let annual YTM be i%

$1,081 = $90 * PVIFA(i%, 4) + $1,000 * PVIF(i%, 4)

Using financial calculator:
N = 4
PV = -1,081
PMT = 90
FV = 1000

I = 6.63%

Annual YTM = 6.63%

Answer b.

You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.