Question

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest...

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9 percent. Is the bond fairly priced, underpriced, or overpriced? Also find the magnitude of the mispricing (if any).

please explain how you get all the numbers in excel would be good

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Answer #1

Hi,

Hope you are doing good.

This question can be easily done on excel with the help of PV Function or Present value function.

PV ( rate, nper, pmt, fv, type)

Here rate is the rate of retun per period

NPeriod is number of periods

PMT = coupon payment

FV = future value or fave value

Type ,= payment at end or begining of period

Substitution of values given below in formula

Rate = 9

Nperiod = 10

PMT = 100

Future Value = 1000

Compute Present Value = 1064.17

As the current market price of bond is below intrinsic value calculated, it is underpriced

I hope this helps you

Please press the like button

Took a lot of efforts

Thanks & Regards

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