In: Finance
?(Bond valuation?) You own a 15?-year, $1,000 par value bond paying 7.5 percent interest annually. The market price of the bond is ?$800, 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
1.
Expected rate of return = YTM or Yield = 10.15%
Using financial calculator BA II Plus - Input details: |
# |
FV = Future Value / Face Value = |
-$1,000.00 |
PV = Present Value = |
$800.00 |
N = Total number of periods = Number of years x frequency = |
15 |
PMT = Payment = Coupon / frequency = |
-$75.00 |
CPT > I/Y = Rate per period or YTM per period = |
10.152 |
Convert Yield in annual and percentage form = Yield*frequency / 100 = |
10.15% |
2.
Bond value at required rate of return = $693.51
Using financial calculator BA II Plus - Input details: |
# |
I/Y = Rate or yield / frequency of coupon in a year = |
12.000000 |
PMT = Coupon rate x FV / frequency = |
-$75.00 |
N = Number of years remaining x frequency = |
15 |
FV = Future Value = |
-$1,000.00 |
CPT > PV = Present value of bond |
$693.51 |
3.
Yes,
We should sell bond because it selling at $800 presently and calculated price of the bond at required rate of return is $693.51