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You own a 10-year, $1,000 par value bond paying 8 percent interest annually
You own a 10-year, $1,000 par value bond paying 8 percent interest annually. The market price of the bond is $925, and your required rate of return is 11 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? a. What is the expected rate of return of the 10-year, $1,000 par value bond paying 8 percent interest annually if its market price is $925? % (Round to two decimal places.)
Expert Solution
Calculating Expected Return,
Using TVM Calculation,
I = [PV = -925, FV = 1,000, PMT = 80, N = 10]
I = 9.18%
Calculating Price at required Rate
Using TVM Calculation,
PV = [FV = 1,000, PMT = 80, N = 10, I = 0.11]
PV = $823.32
As rate at current price is less than 11% one shouldn't buy the bond
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