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?(Bond valuation) The 9?-year ?$1,000 par bonds of Vail Inc
?(Bond valuation) The 9?-year ?$1,000 par bonds of Vail Inc. pay 13 percent interest. The? market's required yield to maturity on a? comparable-risk bond is 14 percent. The current market price for the bond is $1,050.
a. Determine the yield to maturity.
b. What is the value of the bonds to you given the yield to maturity on a? comparable-risk bond?
c. Should you purchase the bond at the current market? price?
Expert Solution
a. Computation of Yield to Maturity using Rate Function in Excel:
=rate(nper,pmt,-pv,fv)
Here,
Rate = Yield to Maturity = ?
Nper = 9 years
PMT = $1,000*13% = $130
PV = $1,050
FV = $1,000
Substituting the values in formula:
=rate(9,130,-1050,1000)
Rate or Yield to Maturity = 12.06%
b. Computation of Value of Bonds using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Value of Bonds = ?
Rate = 14%
Nper = 9 years
PMT = $1,000*13% = $130
FV = $1,000
Substituting the values in formula:
=-pv(14%,9,130,1000)
PV or Value of Bond = $950.54
c. Since market value of bond is higher than book value of bond. So investor should not purchase the bond.
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