Bond valuation) You own a 10-year, $1,000 par value bond paying 6.5 percent inte

Question

Bond valuation) You own a 10-year, $1,000 par value bond paying 6.5 percent interest annually. The market price of the bond is $750, and your required rate of return is 12 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 6.5 percent interest annually if its market price is $750? 10.69% (Round to two decimal places.) b. What is the value of the bond to you, given your 12 percent required rate of return? (Round to the nearest cent.)

Explanation / Answer

Expected return need to be calculated using RATE function in excel

a)

Expected return = RATE(10,6.5%*1000,-750,1000)

= 10.69%

b)

Price of bond = PV of coupon payments + PV of par value

= 65*(1-(1+12%)-10) / 12% + 1000/ (1+12%)10

= 689.24

c)

You should sell the bond

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