Question

Harrimon Industries bonds have 6 years left to maturity.Interest is paid annually and the bonds have a $1,000 par value and a coupon rate of 10%.

a. What is the yield to maturity at a current market price of (1) $865 and (2) $1,166?

b. Would you pay $865 for each bond if you thought that a "fair" market interest rate for such bonds was 12%- that is if rd=12%? Explain your answer

Answer 1

a

1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =6

865 =∑ [(10*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^6

k=1

YTM% = 13.42

2

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =6

1000 =∑ [(10*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^6

k=1

YTM% = 10

b

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =6

Bond Price =∑ [(10*1000/100)/(1 + 12/100)^k]     +   1000/(1 + 12/100)^6

k=1

Bond Price = 917.77

Yes because intrinsic value based on market rate is higher than current market price