(Bond valuation) You own a 10-year, $1,000 par value bond paying 8 percent interest annually. The market price of the bond is $775, and your required rate of return is 13 percent.

a. Compute thebond's expected rate of return.

b. Determine the value of the bond toyou, given your required rate of return.

c. Should you sell the bond or continue to ownit?

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 $775?

% (Round to two decimalplaces.)

b. What is the value of the bond toyou, given your 13 percent required rate ofreturn?

$ (Round to the nearestcent.)

c. Should you sell the bond or continue to ownit? (Select the best choicebelow.)

A.

You should sell the bond because thebond'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 thebond's yield to maturity is higher than your expected rate of return and thus it is undervalued.

C.

You should sell the bond because thebond'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 thebond's yield to maturity is lower than your expected rate of return and thus it is overvalued.

Answer rating: 100% (QA)

a To compute the bonds expected rate of return we can use the formula for the yield to maturity YTM ... View the full answer