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Fingen's 11?-year, ?$1,000 par value bonds pay 11 percent interest annually
Fingen's 11?-year, ?$1,000 par value bonds pay 11 percent interest annually. The market price of the bonds is ?$950 and the? market's required yield to maturity on a? comparable-risk bond is 13 percent.
a. Compute the? bond's yield to maturity. (%, Round to two decimal places)
b. Determine the value of the bond to? you, given your required rate of return. ($, Round to two decimal places, EX 102.25)
c. Should you purchase the? bond?
Expert Solution
a. Computation of Bond's Yield to Maturity using Rate Function in Excel:
=rate(nper,pmt,-pv,fv)
Here,
Rate = Yield to Maturity = ?
Nper = 11 Years
PMT = $1,000*11% = $110
PV = $950
FV = $1,000
Substituting the values in formula:
=rate(11,110,-950,1000)
Rate or Yield to Maturity = 11.84%
b. Computation of Price of Bond using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of Bond = ?
Rate = 13%
Nper = 11 years
PMT = $1,000*11% = $110
FV = $1,000
Substituting the values in formula:
=-pv(13%,11,110,1000)
PV or Price of Bonds = $886.26
c. YES. You should purchase the bond, since the bond is trading at Discount.
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