Bond valuation You own a 15year 1000 par value bond paying 6

(Bond valuation) You own a 15-year, $1,000 par value bond paying 6 percent interest annually. The market price of the bond is $925, and your required rate of return is 8 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 15-year, $1,000 par value bond paying 6 percent interest annually if its market price is $925? | % (Round to two decimal places.) b. What is the value of the bond to you, given your 8 percent required rate of return? $(Round to the nearest cent.) c. Should you sell the bond or continue to own it? (Select the best choice below.) O A. You should sell the bond because the bond\'s yield to maturity is higher than your expected rate of return and thus it is undervalued B. You should continue to hold the bond because the bond\'s yield to maturity is higher than your expected rate of return and thus it is undervalued. ° C. You should sell the bond because the bond\'s yield to maturity is lower than your expected rate of return and thus it is overvalued D. You should continue to hold the bond because the bond\'s yield to maturity is lower than your expected rate of return and

Solution

a. 6.81%

Using financial calculator BA II Plus - Input details:

#

FV = Future Value =

$1,000.00

PV = Present Value =

-$925.00

N = Total number of periods = Years x frequency of coupon =

15

PMT = Payment = Coupon / frequency of coupon =

$60.00

CPT > I/Y = Rate or YTM =

                 6.8138

Convert Yield in annual and percentage form = Yield / 100 =

6.81%

b. $828.81

Using financial calculator BA II Plus - Input details:

#

I/Y = Rate or yield / frequency of coupon in a year =

8.00

PMT = Payment = Coupon / frequency of coupon =

-$60.00

N = Total number of periods = Years x frequency of coupon =

15

FV = Future Value =

-$1,000.00

CPT > PV = Bond Value =

$828.81

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I am not able to understand “c” part because it is talking about YTM and expected rate of return. The part a and part b both talk about required rate and expected rate which are synonymously used for YTM.

Using financial calculator BA II Plus - Input details:	#
FV = Future Value =	$1,000.00
PV = Present Value =	-$925.00
N = Total number of periods = Years x frequency of coupon =	15
PMT = Payment = Coupon / frequency of coupon =	$60.00
CPT > I/Y = Rate or YTM =	6.8138
Convert Yield in annual and percentage form = Yield / 100 =	6.81%