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Calculate the value of a bond that will mature in 8 years' time and has a $1000 face value
Calculate the value of a bond that will mature in 8 years' time and has a $1000 face value. The coupon interest rate is 9%p.a. paid annually and the bond investor's required rate of return is 12%.
(b) If the Market Price of the bond is $930, should the investor purchase the bond? (Give a reason for your answer
Expert Solution
Computation of Value of Bond using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Value of Bond = ?
Rate = 12%
Nper = 8 years
PMT = $1,000*9% = $90
FV = $1,000
Substituting the values in formula:
=-pv(12%,8,90,1000)
PV or Value of Bond = $850.97
Market price of bond is higher than its expected value. So, this bond should not be purchased.
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