Question: The Heymann Companys bonds have 4 years remaining to maturity.

Interest is paid annually; the bonds have a $1,000 par value; and the oupon interest rate is !". #$%&' a. (hat is the yield to maturity at a urrent mar)et pri e o* +1, $-.! or +., $1,104/ b. (ould you pay $-.! *or one o* these bonds i* you thought that the appropriate rate o* interest 0as 1." % that is, i* )d 1 1."/ 23plain your ans0er. The e4uation *or al ulating yield to maturity +5T6, is7 5T6 1 I 8 6 9 :o ;;;;n;;;;;;;;; 6 8 :o . (here I1 oupon payment<period in $. 61 maturity value +al0ays $1,000,, :o 1 urrent bond, n 1 number o* periods remaining to maturity. =ur problem loo)s li)e this7 5T6 1 $!0 8 $1,000 % $-.! 1 $!0 8 $1$1 4 $1,000 8 $-.! . . 4 $1,-.! 1 $!0 8 $4..$> 1 $1?..$> 1 14.>." $!14.>0 $!14.>0 pri e o* .

@emember the issues involved that ma)e bond pri es go up and do0n/ Aond pri es *all 0hen interest rates in the e onomy rise above the bondBs oupon rate, 0hi h, *or our purposes, is *i3ed *or the li*e o* the bond. The bondBs pri e *alls be ause the investor an buy ne0ly issued bonds at the urrent +higher, interest rate than the old bonds paid. He 0ould not there*ore buy bonds paying a lo0er oupon rate *or the same pri e as he 0ould pay *or bonds 0ith higher oupon rates. The reverse is true i* interest rates *all belo0 the oupon rate o* the bond. The bond is then more valuable, be ause it is paying a higher oupon rate than investors an get *rom bonds being issued at the ne0 +lo0er, rate. :art a+ii, is 0or)ed in the same 0ay as +i,. Ae are*ul to plug in the right numbers 5T6 1 $!0 8 $1,000 % $1,104 1 $!0 8 +%$104, 1 $!0 % $.& 1 $&4 1 &.0-" 4 $1,000 8 $1,104 . . 4 $.,104 $1,0>. $1,0>.

+b, The ans0er is yes. @emember, 0e Cust al ulated the 5T6 0hen the bondBs pri e 0as $-.!, and *ound it to be $14.>.". Do i* the bond is selling *or $-.! and you thought the re4uired rate o* return 0as 1.", the 5T6 is greater than your re4uired rate o* return, ma)ing it a very attra tive investment.