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The Brownstone Corporation's bonds have 7 years remaining to maturity. Interest is paid yearly, the bonds have a $1,000 par value, and the coupon interest rate is 10%.
a.
1. What is the yield to maturity at a present market price of $858?
2. What is the yield to maturity at a present market price of $1,154?
b. Would you pay $858 for one of these bonds if you thought that the suitable rate of interest was 11% - that is, if rd = 11%.
Describe your answer.
I. You would not purchase the bond as long as the yield to maturity at this price is greater than your needed rate of return.
II. You would purchase the bond as long as the yield to maturity at this price is greater than your needed rate of return.
III. You would purchase the bond as long as the yield to maturity at this price is less than your needed rate of return.
IV. You would purchase the bond as long as the yield to maturity at this price equals your needed rate of return.
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