Bond valuation) The 8-year $1,000 par bonds of Vail Inc. pay 11 percent interest
ID: 2726896 • Letter: B
Question
Bond valuation) The 8-year $1,000 par bonds of Vail Inc. pay 11 percent interest. The market's required yield to maturity on a comparable-risk bond is 7 percent. The current market price for the bond is $1,130.
What is your yield to maturity on the Vail bonds given the current market price of the bonds? (Round to two decimal places.)
What should be the value of the Vail bonds given the yield to maturity on a comparable risk bond? (Round to the nearest cent.)
Should you purchase the bond at the current market price?
Explanation / Answer
YTM Formula= [Annual Interest+(Par Value-Market Value)/Years to Maturity]/(Par value+Market Price*2)/3 Given : Bond Par Value 1,000 Market Price 1,130 Years to Maturity 8 Annual Interest @11% 110 YTM =[110+(1000-1130)/8]/(1000+1130*2)/3=8.68% a So YTM of Vali Bond =8.68% b Bond Price calculation if the YTM would have been7% Year Interest+Maturity PV factor @7% PV of Cash flows Year 1 110 0.9346 102.80 Year 2 110 0.8734 96.08 Year 3 110 0.8163 89.79 Year 4 110 0.7629 83.92 Year 5 110 0.7130 78.43 Year 6 110 0.6663 73.30 Year 7 110 0.6227 68.50 Year 8 1,110 0.5820 646.03 1,239 So The Price of Vali bond with 7% YTM would be = $ 1,238.85 c As the YTM of Vali Bond is higher than comparable bond , I shall purchase the Vali Bond at current Market Price.