You own a 15 year, $1,000 par value bond paying 6 percent interest annually. The

Question

You own a 15 year, $1,000 par value bond paying 6 percent interest annually. The market price of the bond is required rate of return 9 percent. Compute the bonds expected late of return. Determine the value of the bond to you, given your required rate of return 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 $850? b. What is the value of the bond to you, given your 9 percent required rate of return? c. Should you sell the bond or continue to own it? 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 thus it is overvalued.

Explanation / Answer

The expected rate of return on the bond will be 7.059%, given the details in the problem. The value of the bond, given the required rate of return as 9 per cent, will be $ 758.179 or $ 758. Since the bond's yield to maturity is lower than your expected rate of return and thus it is overvalued, the bond should be sold.

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