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(Bond valuation? relationships) The 16?-year, ?$1,000 par value bonds of Waco Industries pay 7 percent interest annually
(Bond valuation? relationships) The 16?-year, ?$1,000 par value bonds of Waco Industries pay 7 percent interest annually. The market price of the bond is ?$865?, and the? market's required yield to maturity on a? comparable-risk bond is 10 percent.
a. Compute the? bond's yield to maturity.
b. Determine the value of the bond to you given the? market's required yield to maturity on a? comparable-risk bond.
c. Should you purchase the? bond?
Expert Solution
a. Computation of Yield to Maturity using Rate Function in Excel:
=rate(nper,pmt,-pv,fv)
Here,
Rate = Yield to Maturity = ?
Nper = 16 years
PMT = $1,000*7% = $70
PV = $865
FV = $1,000
Substituting the values in formula:
=rate(16,70,-865,1000)
Rate or Yield to Maturity = 8.58%
b. Computation of Value of Bonds using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Value of Bonds = ?
Rate = 10%
Nper = 16 years
PMT = $1,000*7% = $70
FV = $1,000
Substituting the values in formula:
=-pv(10%,16,70,1000)
PV or Value of Bond = $765.29
c. Since market value of bond is higher than book value of bond. So investor should not purchase the bond.
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