Assume that you are an intern with the Brayton Company, and you have collected the following data: The yield on the company's ou
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Answer:
a) The value of the bond (to you) is 959.6965579
b)
- if the value of the market's required yield to maturity on a comparable-risk bond increases to 11 percent ; we have the value to be 820.2282606
- if the market's required yield to maturity on a comparable-risk bond decreases to 7 percent; we have the value to be 1136. 61871
c) Yield to maturity is the expected return on holding the bond till maturity
Thus, Bonds should be purchased when the yield to maturity is the highest ; As such!, if the yield to maturity on a comparable - risk bond decrease to 7%.
You should purchase the Stanley bonds at the current market price of $960.
Explanation:
Given that:
Par Value (F) = $1000
Interest Rate ( annual coupon rate) = $85
Market demand return ( yield to maturity) = 9% = 0.09
Time of maturity = 15 years
a. What is the value of the bond to you?
The value of the bond can be calculated as follows:
=
=
= 959.6965579
Thus, the value of the bond to you = 959.6965579
b. What happens to the value if the market's required yield to maturity on a comparable-risk bond increases to 11 percent .
If increase to 11 % occurs:
we have :
=
=
= 820. 2282606
Hence, if the value of the market's required yield to maturity on a comparable-risk bond increases to 11 percent ; we have the value to be 820. 2282606
What happens to the value if the market's required yield to maturity on a comparable-risk bond decreases to 7 percent?
If decrease to 7% occurs:
=
=
= 1136. 61871
c) Under which of the circumstances in part b should you purchase the bond?
Yield to maturity is the expected return on holding the bond till maturity
Thus, Bonds should be purchased when the yield to maturity is the highest ; As such!, if the yield to maturity on a comparable - risk bond decrease to 7%.
You should purchase the Stanley bonds at the current market price of $960.