7b please Ron Rhodes calls the broker to inquire about purchasing a bond of Gold

Question

7b please Ron Rhodes calls the broker to inquire about purchasing a bond of Golden Years Corporation. His broker quotes a price of $1,170. Ron is concerned that bond might be overpriced based on the facts involved. The $1000 par value bond pays 13% annual interest coupon rate, and it has 18 years remaining until maturity. The current yield to maturity on similar bonds is 11%. Do you think the bond is overpriced? show necessary calculations to prove your answer. What if the current yield increase to 12%? what is the new price?

Explanation / Answer

7a)expected Price of bond =(PVAF@11%, 18 *Interest ) +(PVF@11%,18 *Par value)

                                     = (7.70162 * 130)   + ( .15282 *1000)

                                     = 1001.21 + 152.82

                                    = 1154.03

yes ,The bond is overpriced as based on yield to maturity the price of bond should be= $ 1154.03 but it is trading at$ 1170

b)Expected price = (PVAF@12%,18 *Interest ) +(PVF@12%,18 *Face value)

                             = (7.24967 * 130) +   (.13004 *1000)

                              = 942.46+ 130.04

                               = 1072.50

Then the bond is still overpriced Adn new price =$ 1072.5

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