Final answer:
The yield to maturity (YTM) of a bond is calculated by equating the present value of all future cash flows to the bond's current price. It is not advisable to purchase a bond at a price that results in a YTM lower than that of a comparable-risk bond offering the same return.
Step-by-step explanation:
To calculate the yield to maturity (YTM) of the Saleemi Corporation's bond, we must consider the annual interest payment, the price paid for the bond, and the number of years until maturity. Since the bond pays 9% interest on a $1,000 face value, the annual interest payment is $90. The bond is being purchased for $1,125 and has 9 years left until maturity. The YTM calculation involves finding the rate at which the present value of all future cash flows (interest payments and the repayment of face value at maturity) equals the current price of the bond. Unfortunately, the YTM formula is complex and typically requires a financial calculator or software to solve iteratively.
If a comparable-risk bond is offering a YTM of 9%, purchasing a bond at a price that results in a lower YTM is generally not advisable. This is because you could receive a better return on investment by purchasing the comparable-risk bond at the same YTM of 9%. As interest rates rise, the market price of existing bonds falls to bring their YTM in line with new bonds being issued at the higher rates. Conversely, if rates fall, prices of existing bonds increase.