To solve these questions, let's break down the problem:

a. Yield to Maturity (YTM)

The Yield to Maturity (YTM) is the interest rate at which the present value of all future cash flows (coupons and face value) equals the price of the bond.

Given:

• Face value of the bond (F) = $1,000
• Annual coupon payment (C) = 8% of $1,000 = $80
• Number of years to maturity (n) = 13 years
• Price of the bond (P) = $855

The YTM is found by solving the following equation:

$P = \sum_{t=1}^{n} \frac{C}{(1+YTM)^t} + \frac{F}{(1+YTM)^n}$

Substituting the known values:

$855 = \sum_{t=1}^{13} \frac{80}{(1+YTM)^t} + \frac{1000}{(1+YTM)^{13}}$

This equation is solved iteratively or using a financial calculator. I'll calculate the YTM for you.

b. Compare with the required YTM

If the YTM found in part (a) is higher than 12%, the bond is a good purchase. If it is lower, it would not be advisable to purchase it.

Let's calculate the YTM.### a. Yield to Maturity (YTM) The Yield to Maturity (YTM) on the bond is approximately 10.05%.

b. Should You Purchase the Bond?

Since the YTM of 10.05% is lower than the 12% YTM required for a comparable-risk bond, it would not be advisable to purchase this bond if you are looking for a return equivalent to the 12% benchmark.

Would you like more details on any of these calculations, or do you have any other questions?

Related Questions

1. What factors can cause bond prices to rise or fall?
2. How does the YTM change if the bond price increases?
3. What is the relationship between bond price and market interest rates?
4. How does YTM differ from the coupon rate of a bond?
5. Can YTM be negative? Under what circumstances?

Tip: When comparing bonds, always consider the YTM in relation to your required return and not just the coupon rate.