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​(Bond valuation​) You own a 20​-year, ​$1 comma 000 par value bond paying 7 percent interest...

​(Bond valuation​) You own a 20​-year, ​$1 comma 000 par value bond paying 7 percent interest annually. The market price of the bond is ​$950​, and your required rate of return is 9 percent.

a. Compute the​ bond's expected rate of return.

b. Determine the value of the bond to​ you, given your required rate of return.

c. Should you sell the bond or continue to own​ it?

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Answer #1

a. Expected return of bond is Yield to Maturity (YTM) of Bond

YTM of this bond is = coupon/Price = 1000*7%/950 = 70/950= 0.0737 or 7.37%

b. Value of bond is its discounted cashflow at present value over the life of bond which is as belos

Therefore, current value of bond is $ 817.43

c. Since the market price of bond is $ 950 but value of bond is $ 817.43 therefore we sould sell the bond

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