The 8-year $1,000 par bonds of Vail Inc. pay 12 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?

Guest May 17, 2017

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The 8-year $1,000 par bonds of Vail Inc. pay 12 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?

Yields on bonds are generally calculated on a semi-annual compound basis. So I'm going to give you the yield on your bond as compounded semi-annually:

The yield on this bond =9.63% at the price of $1,130 compounded semi-annually.

It is value at a comparable-risk bond of 7% would be =$1,302.35.

I would most certainly buy it at the current market price of $1,130 !!!, since comparable-risk bonds are at more than $1,300 !!.

Guest May 17, 2017

edited by
Guest
May 18, 2017