Question

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9 percent. Is the bond fairly priced, underpriced, or overpriced? Also find the magnitude of the mispricing (if any).

Answer 1

Fair Price > Actual Price - Under Valued

Fair Price = Actual price - Perfectly priced

Fair Price < Actual Price - Over Priced.

Value of Bond = PV of Cfs from it.

Year	CF	PVF @9%	Disc CF
1	$    100.00	0.9174	$      91.74
2	$    100.00	0.8417	$      84.17
3	$    100.00	0.7722	$      77.22
4	$    100.00	0.7084	$      70.84
5	$    100.00	0.6499	$      64.99
6	$    100.00	0.5963	$      59.63
7	$    100.00	0.5470	$      54.70
8	$    100.00	0.5019	$      50.19
9	$    100.00	0.4604	$      46.04
10	$    100.00	0.4224	$      42.24
10	$ 1,000.00	0.4224	$    422.41
Fair Value of Bond	$ 1,064.18

Fair Price = 1064.18

Actual Price = 1050

As Fair Price > Actual price, Bond is Under Valued.