The Saleemi Corporations 1000 bonds pay 9 percent interest a

The Saleemi Corporation\'s $1,000 bonds pay 9 percent interest annually and have 9 years until maturity. You can purchase the bond for $945.

a.What is the yield to maturity on this bond?

b.Should you purchase the bond if the yield to maturity on acomparable-risk bond is 8 percent?

Solution

Yield to maturity = Interest + Face value - Price / N / Face Value + Price /2

= 90+(1000-945)/9/1000+945/2

= 90+6.11/972.50

= 96.11/972.50 i.e 9.88%

No Bond should not be purchased if the yield on comparable bond is 8%