(9) Yield to maturity: Heymann Company bonds have 4years left to matur

QUESTION

(9) Yield to maturity: Heymann Company bonds have 4years left to maturity. Interest is paid annually, andthe bonds have a $1,000 par value and a coupon rate of9 percent.a. What is the yield to maturity at a current marketprice of (1) $829 or (2) $1,104?b. Would you pay $829 for each bond if you thoughtthat a fair market interest rate for such bonds was12 percentthat is, if rd = 12 percent? Explain youranswer.
Part a YTM formula = (Interest + (Future value-Present value)/N) / (Future value-Present value)/2 Interest 1000 * 9% 90 Future value 1000 Present value 829 & 1104 YTM @ 829 (90 + ((1000-829)/4)) / ((1000+829)/2) 14.52% YTM @ 1104 (90 + ((1000-1104)/4)) / ((1000+1104)/2) 6.08% Part b Suppose YTM given 12 %¦

then Present value should be 12% (90 + (250-0.25P)) / (500+0.5P) P = 903.2 If price of each bond is running less than what it should actually be i.e 903.2 then the bond should be purchased at a lower price .

ANSWER:

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