   Chapter 7, Problem 9P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

YIELD TO MATURITY Heymann Company bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%. a. What is the yield to maturity at a current market price of (1)$829 and (2) $1,104? b. Would you pay$829 for each bond if you thought that a "fair" market interest rate for such bonds was 12%—that is, if rd = 12%? Explain your answer.

(a)

Summary Introduction

To calculate: Yield to maturity (YTM).

Yield to Maturity (YTM): It refers to the rate of interest earned till the maturity of the bond by the bond holder.

Explanation

(1)

Given,

Coupon rate is 9%.

Selling price (value of bond) is $829. Par value of bond is$1,000.

Maturity is after 4 years.

Yield to maturity (YTM) can be calculated through value of bond.

Formula to calculate present value of bond,

Bond'svalue=t=1NINT(1+rd)t+Parvalue(1+rd)N

Where,

INT= Interest rate

N= Number of year for maturity.

Rd= Rate of discount.

Table (1)

Here, yield to maturity is 15%.

(2)

Given,

Coupon rate is 9%

(b)

Summary Introduction

To identify: Whether \$829 should be paid when interest rate was 12%.

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