In: Finance
You own a 10-year, $1 comma 000 par value bond paying 7 percent interest annually. The market price of the bond is $900, and your required rate of return is 10 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?
(a)-Bond's expected rate of return
Variables |
Financial Calculator Keys |
Figure |
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
Coupon Amount [$1,000 x 7.00%] |
PMT |
70 |
Market Interest Rate or Yield to maturity on the Bond |
1/Y |
? |
Maturity period/Time to Maturity [10 Years] |
N |
10 |
Bond Price/Current Market Price of the Bond [-$900] |
PV |
-900 |
We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the yield to maturity (I/Y) on the bond = 8.53%
“Hence, the Bond's expected rate of return will be 8.53%”
(b)-Value of the Bond at required rate of return of 10%
Variables |
Financial Calculator Keys |
Figures |
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
Coupon Amount [$1,000 x 7.00%] |
PMT |
70 |
Market Interest Rate or Yield to maturity on the Bond [10.00%] |
1/Y |
10 |
Maturity period/Time to Maturity [10 Years] |
N |
10 |
Bond Price/Current Market Price of the Bond |
PV |
? |
Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $815.66.
“Hence, the Value of the Bond will be $815.66”
(c)-Sell/Own Decision
“WE SHOULD SELL THE BOND”. If the Present Value of the Bond is less than the Par Value of the Bond, then we should sell the bond and else continue to own.