Question

You own a 15?-year, ?$1000 par value bond paying 7 percent interest annually. The market price of the bond is ?$825?, and your required rate of return is 11 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?

Answer 1

Annual interest payment = 0.07 * $ 1000

Annual interest payment = $ 70

a)

The bonds expected rate of return is its yield to maturity

Price = Coupon payment * PVIFA _{r =? , n= 15 years} + Maturity value * PVIF _{r = ? , n = 15 years}

$ 825 = $ 70 * PVIFA _{r =? , n= 15 years} + $ 1000 * PVIF _{r = ? , n = 15 years}

Solving for r

Expected rate of return = 9.20%

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b) Price = $ 70 * PVIFA _{r = 9.20% , n = 15 years} + $ 1000 * PVIF _{r = 9.20% , n = 15 years}

Price = $ 557.65 + $ 267.09

Price = $ 824.74

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c) You should sell the bond because the market price of the bond is slightly higher.