(Bond valuation)

You own a 20-year, $1,000 par value bond paying 6% interest annually. The market price of the bond is

$825, and your required rate of return is 9%.

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 20-year, $1,000 par value bond paying 6% interest annually if its market price is $825?

_____% (Round to two decimal places.)

b. What is the value of the bond to you, given your 9% required rate of return?

_______$ (Round to the nearest cent.)

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.