Question

You own a 10-year, $1,000 par value bond paying 8 percent interest annually. The market price of the bond is $850 and your required rate of return is 12 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

Part A:

YTM is the rate at which PV of Cash Inflows are equal to PV of Cash Outflows

YTM = Rate at which least +ve NPV + [ NPV at that rate ./ chnage in NPV due to 1% inc in rate ] * 1%

= 10% + [ 27.11 / 628.91 ] * 1%

= 10% + 0.04%

= 10.04%

Part B:

Bond price = PV of CFs from it.

Part C:

Actual Price = 850

Fair Price = 773.99

it is Over priced. Hence adviced to seel.