Problem 5-10 Yield to Maturity and Required Returns

The Brownstone Corporation's bonds have 6 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%.

1. 1. What is the yield to maturity at a current market price of $769? Round your answer to two decimal places. %
   2. What is the yield to maturity at a current market price of $1,060? Round your answer to two decimal places. %
2. Would you pay $769 for one of these bonds if you thought that the appropriate rate of interest was 12% - that is, if r_d = 12%. -Select-YesNoItem 3 Explain your answer. -Select-IIIIIIIVItem 4 I. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return. II. You would buy the bond as long as the yield to maturity at this price equals your required rate of return. III. You would buy the bond as long as the yield to maturity at this price does not equal your required rate of return. IV. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.

Bond Valuation and Interest Rate Risk

The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year.

1. 1. What will be the value of each of these bonds when the going rate of interest is 5%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

      Bond L	$
      Bond S	$

   2. What will be the value of each of these bonds when the going rate of interest is 7%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

      Bond L	$
      Bond S	$

   3. What will be the value of each of these bonds when the going rate of interest is 14%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

      Bond L	$
      Bond S	$

2. Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)? -Select-IIIIIIItem 7 I. Longer-term bonds have more interest rate risk than shorter-term bonds. II. Shorter-term bonds have more interest rate risk than longer-term bonds. III. Longer-term bonds have more reinvestment rate risk than shorter-term bonds.