Question

You are interested in purchasing a bond, your required rate of return is 9.5%, you find...

  1. You are interested in purchasing a bond, your required rate of return is 9.5%, you find a bond that has a coupon rate of 8.5%, matures in 10 years, how much is the bond worth to you?
    1. If the bond is currently selling for $935.00 would you be willing to purchase it? Why or why not?

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Answer #1

Price of bond = Coupon * PVIFA (n,i)+ face value * PVIF (n,i)

Price of bond= (1000*8.5%)* PVIFA (10 , 9.5%) + 1000* PVIF (10 ,9.5%)

Price of bond = 85 *6.278798034321640 + 1000 *0.4035141867394450  

= $ 937.21

Hence the correct answer is $ 937.21

a. Fair Value as computed above = $ 937.21

Selling price = $ 935

Since, the Fair Value is more than the Selling Price this means that the bond is under priced and hence can be purchased.

Answer : Yes bond must be purchased.

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