Question

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 10%. What is the yield to maturity at a current market price of (1) $865 and (2) $1,166? Would you pay $865 for each bond if you thought that a "fair" market interest rate for such bonds was 12%—that is, if ? Explain your answer.

Answer 1

Answer:

1) 13.42%

2) 6.56%

Explanation:

a. Given:

Par value of bonds (FV) = $1,000

Coupon rate = 10%

Coupon payment (pmt) = 0.1 × 1,000 = $100

Present value of bond = $865

Maturity period (nper) = 6

Use spreadsheet function =rate(nper,pmt,-PV,FV)

Yield to maturity when price of bond is $865 is 13.42%

2) If PV is $1166, then yield to maturity is 6.56%

If interest rate is 12%

FV is $1,000

Pmt is $100

nper = 6

The use spreadsheet function =PV(rate,nper,pmt,FV) to compute present value of bond.

Present value of bond is $917.77

Since present value of bond is more high, one can pay $865 for each bond.