Question

The market price of an 8 year, zero coupon bond is $476. Your cousin asks you if he should buy the bond, given his required return is 11 percent. Would you recommend he buy the bond or not? No because his required return is greater than the bond's yield of 24.5% Yes because his required return is less than the bond's yield of 9.7% No because his required return is less than the bond's yield of 24.5% No because his required return is less than the bond's yield of 9.7%.

Answer 1

Par Value = $1,000
Current Price = $476
Time Period = 8 years

Let yield on bond be i%

$476 = $1,000 / (1 + i)^8
(1 + i)^8 = 2.100840
1 + i = 1.097
i = 0.097 or 9.7%

Bond Yield = 9.7%

No, you should not buy the bond because his required return is greater than the bond’s yield of 9.7%.