48 true dd Wendy Franey1 6/19/18 8:43 PM FIN-320-06132 Principles of Finance 18E

Question

48 true dd Wendy Franey1 6/19/18 8:43 PM FIN-320-06132 Principles of Finance 18EWS Save Homework: 7-1 MyFinanceLab Assignment Score: 0 of 4 pts P9-15 (similar to) 9 of 12 (& complete) MN Score: 12%, 6 of 50 pts EQuestion Help dto? ckpo t32and Checkpoldu pond valuation) The Iyear $1.000 pa bodsot Val inc pay t2 pe cent meest The markers required yield to matty on acomparable.isk bond b 9 percent The current market price for the bond is $1 070 td b. What is the vaue of be bonds te you given the yelid to maturithy on a conmparable risk bond c. Should you purchase tihe bond at the cument market price? Pound to twg decimal gaces 2 Show all X 43 PM 0

Explanation / Answer

a. Yield to maturity 10.68% Working: i. Approximation Method: Par Value         1,000 Semi annual coupon interest 1,000.00 x 6% =               60 Current Price         1,070 Semi annual coupon period = 16 Yield to maturity = Average Income / Average Investment (Semi annual) = (Coupon+(Par Value -Current Price)/Semi annual coupon period)/((Par Value + Current Price)/2) = (60+(1000-1070)/16)/((1000+1016)/2) = 5.52% Yield to maturity = 5.52% x 2 = 11.04% (Annual) Above method is an approximation metthod: ii. Exact Yield to Maturity through excel, Yield to maturity = =rate(nper,pmt,-pv,fv) Where, nper 16 (Semi annual) = =rate(16,60,-1070,1000) pmt               60 = 5.34% pv         1,070 fv         1,000 Yield to maturity = 5.34% x 2 (Annual) = 10.68% Thus, Yield to maturity 10.68% 2) Value of bond at 9% risk $ 1,168.51 Working: i. Value of bond is the present value of cash flow from bond. Semi annual period Cash flow Discount factor Present Value 1-16               60    11.2340 $     674.04 16         1,000      0.4945 $     494.47 Current price $ 1,168.51 ii. Present value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.045)^-16)/0.045 i 4.50% =       11.2340 n 16 iii. Present value of 1 = (1+i)^-n = (1+0.045)^-16 =         0.4945 3) Value of Vat,Inc's bond is $ 1,070 whereas Market value of bond is $ 1,168.51. It shows that bond of Vat,Inc's bond is undervalued.So, it is time to invest in Vat,Inc's bond. So, we should purchase the bond at current market price.

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