Question

(Related to Checkpoint 9.2 and Checkpoint 9.3) (Bond valuation) The 14-year $1,000 par bonds of Vail Inc. pay 13 percent interest. The market's required yield to maturity on a comparable-risk bond is 10 percent. The current market price for the bond is $1,130 a. Determine the yield to maturity. b. What is the value of the bonds to you given the yield to maturity on a comparable-risk bond? c. Should you purchase the bond at the current market price? a. What is your yield to maturity on the Vail bonds given the current market price of the bonds? % (Round to two decimal places.)

Answer 1

Answer :

(a.) Calculation of Yield to maturity

Yield to maturity can be calculated using RATE function

=RATE(nper,pmt,pv,fv)

where nper is the number of years to maturity i.e 14

pmt is periodic coupon payment i.e 1000 * 13% = 130

pv = Current Market Price i.e 1130

Note : pv should be taken as negative.

fv = face value i.e 1000

=RATE(14,130,-1130,1000)

Onsolving

we will get Yield to maturity equals to 11.13%

(b.) Calculation of Value of Bond given the yield to maturity on comparable - risk bond

Current Market price can be calculated using PV function of Excel

=PV(rate,nper,pmt,fv)

where rate is yield to maturity i.e 10%

nper is the years to maturity i.e 14

pmt is coupon payment i.e 1000 * 13% = 130

fv is the face value i.e 1000

=PV(10%,14,-130,-1000)

Current Bond Price is $1221.

(c.) Yes ,we should purchase the bond as bond is undervalued.