Bond valuation) The 8-year $1,000 par bonds of Vail Inc. pay 11 percent interest
ID: 2726905 • 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
What is your yield to maturity on the Vail bonds given the current market price of the bonds? (Round to two decimal places.)
YTM = I + [(P1-P0)/n]/(P1+P0)/2
= 110 + [ (1000-1130)/8]/(1000+1130)/2
= 110 -16.25/ 1065
= 0.0880
= 8.80%
What should be the value of the Vail bonds given the yield to maturity on a comparable risk bond? (Round to the nearest cent.)
Year
Cash flow
PVF@7%
Present value
1
110
0.934579439
102.80
2
110
0.873438728
96.08
3
110
0.816297877
89.79
4
110
0.762895212
83.92
5
110
0.712986179
78.43
6
110
0.666342224
73.30
7
110
0.622749742
68.50
8
1110
0.582009105
646.03
1238.85
Should you purchase the bond at the current market price?
Yes, We should purchase the bond as the current market price ($1130) of the bond is less than Expected current value ($1238.85) of the same bond.
Year
Cash flow
PVF@7%
Present value
1
110
0.934579439
102.80
2
110
0.873438728
96.08
3
110
0.816297877
89.79
4
110
0.762895212
83.92
5
110
0.712986179
78.43
6
110
0.666342224
73.30
7
110
0.622749742
68.50
8
1110
0.582009105
646.03
1238.85