10. (Related to Checkpoint 9.2) (Yield to maturity) The Saleemi Corporation\'s $

Question

10. (Related to Checkpoint 9.2) (Yield to maturity) The Saleemi Corporation's $1,000 bonds pay 8 percent interest annually and have 15 years until maturity. You can purchase the bond for $1,085 a. What is the yield to maturity on this bond? b. Should you purchase the bond if the yield to maturity on a comparable-risk bond is 6 percent? a. The yield to maturity on the Saleemi bonds is b. You (1) purchase the bonds because your yield to maturity on the Saleemi bonds is %. (Round to two decimal places.) than the one on a comparable risk bond. (Select from the drop-down menus.) (1) O should (2) greater O less O should not

Explanation / Answer

Bond face value 1000 $ Coupon 8% % Time 15 Yrs Current Price 1085 $ YTM = (C + (F - P) / n) / ((F + P) / 2) YTM= Yield to Maturity C Coupon (Rate X Face value in $) C =8%*1000 C 80 $ F Face value F 1000 $ P Price P 1085 $ n 15 Period YTM =((80+(1000-1085)/15)/((1000+1085)/2) YTM 7.13% Yield to Maturity of the bond is 7.13% Similar bond with a comparable risk offers 6% which is less than the current YTM of 7.13%. You should purchase the bond as YTM is 1.13% greater than the one with comparable risk.

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