Problem 5-10 Yield to Maturity and Required Returns The Brownstone Corporation\'
ID: 2815015 • Letter: P
Question
Problem 5-10 Yield to Maturity and Required Returns The Brownstone Corporation's bonds have 4 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 9%. What is the yield to maturity at a current market price of $851? Round your answer to two decimal places. % What is the yield to maturity at a current market price of $1,077? Round your answer to two decimal places. % Would you pay $851 for one of these bonds if you thought that the appropriate rate of interest was 13% - that is, if rd = 13%. Explain your answer. I. You would buy the bond as long as the yield to maturity at this price does not equal your required rate of return. II. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return. III. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return. IV. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
Explanation / Answer
N=4
FV=$1000
Coupon= 9%*1000 = 90
1:YTM at a price of $851 is calculated using financial calculator
(n=4, fv=1000,pmt=90,pv=-851,
I/Y = 14.13%
2: YTM at a price of $1077 is calculated using financial calculator
(n=4, fv=1000,pmt=90,pv=-1077,
I/Y = 6.74%
3: II. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return
If the YTM > Required return it means that there is a gain on the investment