Question

In: Finance

You own a 15​-year, ​$1,000 par value bond paying 7.5 percent interest annually. The market price...

You own a 15​-year, ​$1,000 par value bond paying 7.5 percent interest annually. The market price of the bond is ​$775​, 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?

Solutions

Expert Solution

a)

Hence, Bond's expected return is 10.55%

b)

Hence, Bond value is $693.51

c)

Bond should be sold. It is overpriced.

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