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

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

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%. a. What is the yield to maturity at a current market price of (1)$865 and (2) $1,166? b. Would you pay$865 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 identify: 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

Given,

Coupon rate is 10% or 0.10.

Selling price (value of bond) is $865. Par value of bond is$1,000.

Maturity is after 6 years.

Yield to maturity (YTM) can be computed through the bond value.

Formula to calculate present value of bond,

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

Summary Introduction

To identify: 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.

(b)

Summary Introduction

To identify: Whether \$865 should be paid when interest rate was 12%.

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