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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. 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?
Expert Solution
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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