YIELD TO MATURITY Harrimon Industries bonds have 6 years lef

YIELD TO MATURITY

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 8%.

What is the yield to maturity at a current market price of

$797? Round your answer to two decimal places.
   %

$1,150? Round your answer to two decimal places.
   %

Would you pay $797 for each bond if you thought that a \"fair\" market interest rate for such bonds was 12%-that is, if rd = 12%?

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

You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

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.

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

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

Solution

1.

Yield to Maturity for price of $797 = 13.09%

Using financial calculator BA II Plus - Input details:

#

FV = Future Value =

-$1,000.00

PV = Present Value =

$797.00

N = Total number of periods = Number of years x frequency =

6

PMT = Payment = Coupon / frequency =

-$80.00

CPT > I/Y = Rate per period or YTM per period =

                  13.0910

Convert Yield in annual and percentage form = Yield*frequency / 100 =

13.09%

2.

Yield to Maturity for price of $1150 = 5.04%

Using financial calculator BA II Plus - Input details:

#

FV = Future Value =

-$1,000.00

PV = Present Value =

$1,150.00

N = Total number of periods = Number of years x frequency =

6

PMT = Payment = Coupon / frequency =

-$80.00

CPT > I/Y = Rate per period or YTM per period =

                    5.0409

Convert Yield in annual and percentage form = Yield*frequency / 100 =

5.04%

3.

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

Because at rd = 12% we will have higher bond price and $797 is giving us YTM of 13.09% which means we will benefited from deal if we buy at $797