Question

Minneapolis Health System has bonds outstanding that have four years remaining to maturity, a coupon interest rate of 9% paid annually, and a $1,000 par value. Would you be willing to buy one of these bonds for $829 if you required a 12% rate of return on the issue?

Yes

No

Answer 1

The option is yes, the bond should be bought.

The calculation of bond at 12% required rate of return is shown below:

Value of bond = coupon/(1+r) + coupon in year 2/(1+r)^2 + coupon in year 3/(1+r)^3 + (coupon +Par value)/(1+r)^4

Value of bond=(90/1.12)+[90/(1.12)^2]+ [90/(1.12)^3]+[1090/(1.12)^4]

= 908.88

Therefore, the bond should be bought as it is available at lower price($829).