Question

Hanna Inc. has a proprietary bond-rating model and has determined the required return on the following Amerco bond is 9.6%. Assume the bond is being evaluated in the current month of 2018 and matures in the current month of the year indicated. Based on this information, calculate the amount the bond is over- or under-priced.

Bond                Coupon (%)     Maturity         Last Price (% of par)

Amerco            15.00                2023                105.25

Over-priced by $158.03

Under-priced by $158.03

Under-priced by $52.50

Over-priced by $52.50

Over-priced by $210.53

Under-priced by $210.53

Answer 1

answer)

The valuation bond formula,

V = sum of PV ( cash inflow , at YTM, for T years)

Here, YTM = 9.6% , T = 2023 ....2018= 1 to 5 years , Cash inflow = Coupon rate recieved ( 15%) and value of maturity at end.

No detail has been given for maturit value, so consider as at Par maturity.

As per question,

year	Cash inflow	Pv( cash flow)
1	15	13.68613
2	15	12.48735
3	15	11.39356
4	15	10.39559
5	15	9.485025
5	100	63.2335
		120.68

Price of bond should be $ 120.68 and current price given $105.25

So,Bondis under priced by = 120.68 - 105.25 = $15.43