Your boss has indicated that he would like your help in determining the value of

Question

Your boss has indicated that he would like your help in determining the value of a bond issue currently under review. The firm has bonds outstanding that have four (04) years remaining to maturity, a coupon interest rate of 10 percent paid annually, and a $1,000 par value.

a. What is the yield to maturity on the bond issue if the current market price is $829?

b. What is the yield to maturity on the bond issue if the current market price is $1,104?

c. Would you be willing to buy one of these bonds for $829 if you required a 12 percent rate of return on the bonds issue? Explain your answer. PLEASE EXPLAIN HOW TO PUT IN EXCEL

Explanation / Answer

Answer:

YTM can be found using excel function of ' =rate(nper,pmt,(pv),fv,0)

Where = nper = no. of periods to maturity = 4

Pmt= coupon payment = $1000*10% = $100

and "0" becasue of end of the period coupon receipt

a) pv = $829    b) pv =$1,104, should be entered as negetive beacuse it's an outflow

fv = $1000

So now =

a) For a "=RATE(4,100,-829,1000,0)" =16.13%

b) "=RATE(4,100,-1104,1000,0)" = 6.93%

c) Present value of the bond at a required rate of return =

Using excel function: "=PV(rate,nper,pmt,fv,0)

=PV(12%,4,100,1000,0) = -$939.25 (negetive because - Outflow now)

So as the matket price of the bond is $829, which is less than its fair value of $939.25, the bonds should be bought.

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