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Investment in Bonds

Tom Jones is considering investing in a bond currently selling for $8785.07. The bond has 4 years to maturity, a $10,000 face value, and 8% coupon rate. The next annual interest payment is due 1 year from today. The appropriate discount rate for investments of similar risk is 10%.

a) Calculate the intrinsic value of the bond. On the basis of this calculation should Tom purchase the bond?
b) Calculate the yield to maturity of the bond. On the basis of this calculation should Tom purchase the bond?

Note: Show all works.

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Solution Summary

The solution calculates the intrinsic value and the yield to maturity of the bond.

$2.19