Final answer:
To determine if the Vail Inc. bond is a good purchase, one must calculate its yield to maturity (YTM) and compare it to the market's required yield. If the YTM, which accounts for price, par value, interest rate, and time to maturity, is higher than the market's required yield, the bond may be undervalued and a wise investment.
Step-by-step explanation:
Yield to Maturity (YTM) Calculation
The yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. The YTM considers the bond's current market price, par value, coupon interest rate, and time to maturity. It is often considered a more accurate measure of the bond’s return than the current yield.
Calculating the Value of the Bond
The value of a bond to an investor based on the market's required yield to maturity can be calculated using the present value method, which discounts future cash flows back to their present value at the market's required rate of return.
Purchase Decision
To decide whether to purchase the bond at the current market price, we compare the bond's YTM to the market's required rate of return. If the YTM is higher than the market rate, the bond is undervalued and might be a good purchase. If the YTM is lower, the bond is potentially overvalued.