Q3. Ahmed has been offered a 10-year bond issued by Homer, Inc., at a price of...

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Q3. Ahmed has been offered a 10-year bond issued by Homer, Inc., at a price of...

Q3. Ahmed has been offered a 10-year bond issued by Homer, Inc., at a price of $800. The bond has a coupon rate of 7 percent and pays the coupon semiannually. Similar bonds in the market will yield 10 percent today.

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Answer 1

Answer #1

We have to calculate the Yield to maturity of the bond and compare it to 10%, which is the yield being offered by similar bonds in the market, to see if it is a worthy investment.

		Calculation
Price	800	Given
Time to maturity	10	Given
Time periods	20	10*2
Coupon	35	(7% of 1000)/2
Future value	1000	Nominal Value
YTM	5.1214%	rate function of Excel used

Alternatively, a financial calculator may be used:

N = 20
PV = -800
FV = 1000
PMT = 35
CPT I/Y = 5.1214%

The bond has a yield to maturity of only 5%. We must not invest in the bond as other bonds will yield 10%

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Answer 2

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