Question

(Bond valuation) You own a 15-year $1.000 par value bond paying 7.5 percent interest annually. The market price of the bord is $825, 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 15-year, $1,000 par value bond paying 7.5 percent interest annually if its market price is $825? % (Round to two decimal places.)

Answer 1

a. PV of bond =825
Par Value =1000
Number of years =15
Coupon =7.5%*1000 =75
YTM or required rate using rate function =RATE(15,75,-825,1000)=9.77%

b. If required rate =11%
Price of Bond =PV of Coupons + PV of Par Value=75*((1-(1+11%)^-15)/11%+1000/(1+11%)^15 =748.32

c. You should sell the bond as required rate of bond is more than YTM of bond