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Homework answers / question archive / 1) The 17-year, $1,000 par value bonds of Waco Industries pay 7 percent interest annually

1) The 17-year, $1,000 par value bonds of Waco Industries pay 7 percent interest annually

Finance

1) The 17-year, $1,000 par value bonds of Waco Industries pay 7 percent interest annually. The market price of the bond is $885, and the market's required yield to maturity on a comparable-risk bond is 10 percent. Compute the? bond's yield to maturity. Determine the value of the bond to you given the market's required yield to maturity on a comparable-risk bond. Should you purchase the bond?

 

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We can calculate the yield to maturity by using the following formula in excel:-

=rate(nper,pmt,-pv,fv)

Here,

Rate = Yield to maturity

Nper = 17 periods

Pmt = Coupon payment = $1,000*7% = $70

PV = $885

FV = $1,000

Substituting the values in formula:

= rate(17,70,-885,1000)

= 8.28%

 

We can calculate the value of bond by using the following formula in excel:-

=-pv(rate,nper,pmt,fv)

Here,

PV = Value of bond

Rate = 10%

Nper = 17 periods

Pmt = Coupon payment = $1,000*7% = $70

FV = $1,000

Substituting the values in formula:

= -pv(10%,17,70,1000)

= $759.35

Since the market price of the bond ($885) is higher than the value of bond. So, we should not purchase the bond.

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