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)