AP work nt Week 4 Homework Q Search this course Check My V C

AP work nt: Week 4 Homework Q Search this course Check My V Clicl Adobe Flash Player Book: Bond Yields Click here to read the eBook: Bonds with Semiannual Coupons YIELD TO MATURITY Hammon 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 2. $1,209? Round your answer to two decimal places was 12%-that is, if rd-12% b, would you pay $879 for each bond if you thought that \'fair\" market interest rate for such bond I. 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 II. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return. IIL You would buy the bond as long as the yield to maturity at this price is less than your required rate of return. IV. You would buy the bond as long as the yield to maturity at this price equals your required rate of return. DOLL

Solution

Answer to Question 1:

Answer a.

If current market price is $879:

Face Value = $1,000
Annual Coupon = 10% * $1,000 = $100
Time to Maturity = 6 years
Current Price = $879

Let Annual YTM be i%

$879 = $100 * PVIFA(i%, 6) + $1,000 * PVIF(i%, 6)

Using financial calculator:
N = 6
PV = -879
PMT = 100
FV = 1000

I = 13.03%

Yield to Maturity = 13.03%

If current market price is $1,209:

Face Value = $1,000
Annual Coupon = 10% * $1,000 = $100
Time to Maturity = 6 years
Current Price = $1,209

Let Annual YTM be i%

$1,209 = $100 * PVIFA(i%, 6) + $1,000 * PVIF(i%, 6)

Using financial calculator:
N = 6
PV = -1,209
PMT = 100
FV = 1000

I = 5.78%

Yield to Maturity = 5.78%

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.