Question

Your broker offers to sell for $1,250 a AAA-rated bond with a coupon rate of 8 percent and a maturity of ten years. Given that the interest rate on comparable debt is 5 percent, calculate the bond's price. Assume that the bond pays interest annually. Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar. $ Is your broker fairly pricing the bond? , so the bond be purchased.

Answer 1

Fair Price of a bond is PV of CFs from it.

Year	CF	PVF @5%	Disc CF
1	$      80.00	0.9524	$   76.19
2	$      80.00	0.9070	$   72.56
3	$      80.00	0.8638	$   69.11
4	$      80.00	0.8227	$   65.82
5	$      80.00	0.7835	$   62.68
6	$      80.00	0.7462	$   59.70
7	$      80.00	0.7107	$   56.85
8	$      80.00	0.6768	$   54.15
9	$      80.00	0.6446	$   51.57
10	$      80.00	0.6139	$   49.11
10	$ 1,000.00	0.6139	$ 613.91
Fair Price of Bond			1231.652

Fair Price of Bond is $ 1231.65 and it is available in Market @ $1250. Hence Bond is Over Priced( Not fairly priced).

Not advicable to Buy.