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Homework answers / question archive /  Bond A is a 20-year, 7% semiannual-pay bond priced with a yield to maturity of 8%, while Bond B is a 25-year, 10% semiannual-pay bond priced with the same yield to maturity

 Bond A is a 20-year, 7% semiannual-pay bond priced with a yield to maturity of 8%, while Bond B is a 25-year, 10% semiannual-pay bond priced with the same yield to maturity

Finance

 Bond A is a 20-year, 7% semiannual-pay bond priced with a yield to maturity of 8%, while Bond B is a 25-year, 10% semiannual-pay bond priced with the same yield to maturity. Given that both bonds have par values of $1,000, the prices of these two bonds would be: A. Bond A $924.08 $924.08 $901.04 B. Bond B S1,156,91 $1,256,63 $1,214.82 C. 34. A SI 000 500

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Option A: Overpriced, So short it

Rf = 6%

Rm = 15%

beta = 1.2

E(r) = Rf + b (Rm – Rf)

= 6% + 1.2 (15% -6%)

= 16.8%

Required Return R (r) = (Dividend + Capital Gain) /Current Selling Price

= (1 +1) / 25

= 8%

Abnormal Return = E(r) – R(r)

= 16.8 - 8%  

= 8.8%

Therefore, stock is overpriced and So short it.

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