Problem 5-10 (Yield to Maturity and Required Returns)

The Brownstone Corporation's bonds have 4 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%.

1. What is the yield to maturity at a current market price of $825? Round your answer to two decimal places. _____________%
2. What is the yield to maturity at a current market price of $1,110? Round your answer to two decimal places. _____________%
3. Would you pay $825 for one of these bonds if you thought that the appropriate rate of interest was 12% - that is, if r_d = 12%? _____________ (Yes or No)
4. Explain your answer by selecting one of the below options (I-IV). I. You would buy the bond as long as the yield to maturity at this price does not equal your required rate of return. II. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return. III. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return. IV. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.