Question

?(Bond valuation?)

National? Steel's 10-year, ?$1,000 par value bonds pay

8 percent interest annually. The market price of the bonds is

?$1,200?, and your required rate of return is 7 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 purchase the? bond?

Answer 1

a.

Bond’s expected rate of return = 5.36%

Using financial calculator BA II Plus - Input details:	#
FV = Future Value =	$1,000.00
PV = Present Value =	-$1,200.00
N = Total number of periods = Number of years =	10
PMT = Payment = Payment =	$80.00
CPT > I/Y = Rate =	5.3639
Rate in % form = Rate / 100 =	5.36%

b.

Present value of bond based on required rate of return = $1,070.24

Using financial calculator BA II Plus - Input details:	#
I/Y = Rate or yield / frequency of coupon in a year =	7.000000
PMT = Coupon rate x FV / frequency =	-$80.00
N = Number of years remaining x frequency =	10.00
FV = Future Value =	-$1,000.00
CPT > PV = Present value of bond =	$1,070.24

c.

No,

You should not purchase the bond because the price of the bond $1200 which is very high with respect to required rate of return viz. 7% and present value of bond at that rate is $1,070.24