# Finance Bond Valuation : Calculation of decision making

Document Sample

Sub: Finance Topic: Bond Valuation

Question:

Calculation of Yield to Maturity and decision making

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You are considering Dell Company and MCI Company bonds. Dell Company bonds mature in 10

years and have a coupon rate of 10% with interest paid semi-annually. MCI Company bonds mature

in 12 years and have a coupon rate of 12% with interest paid annually. Both bonds have a par rate of

\$1,000. Dell bonds are currently selling for \$1,100 while the MCI bonds are priced at \$1,350 If your

required rate of return is 8%, which of these bonds should you buy? Present your reasoning.

Solution:

Particulars Dell Company MCI Company

Number of coupon payments (n) 20 12

Future Value (FV) \$1,000 \$1,000

Interest Rate 10% 12%

Coupon Amount (i) \$50 \$120

Current Price \$1,100 \$1,350

Required Rate of Return (r)

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