The 12-year, $1,000 par value bonds of Waco Industries pay 9 percent interest annually. The market price of the bond is $1,055,
and the market's required yield to maturity on a comparable-risk bond is 7 percent.
a. What is your yield to maturity on the Waco bonds given the current market price of the bond____%?
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_____?
Yield to maturity = [Annual Coupon + (Par value - market value)/Life]/Average Price
= [90-4.58333]/1027.5
= 8.31%
b.Value of bond is equal to the present value of all future coupon payments and the redemption value
= 1,000*9%*PVAF(7%, 12 years) + 1,000*PVF(7%, 12 years)
= 90*7.9427 +1,000*0.4440
= $1,158.84
c.Yes, since price is lower than value of bond
The 12-year, $1,000 par value bonds of Waco Industries pay 9 percent interest annually. The market price of the bond is...
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