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(Bond valuation) You own a 10-year, $1,000 par value bond paying 8 percent interest annually....

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Accounting

(Bond valuation) You own a 10-year, $1,000 par value bond paying 8 percent interest annually. The market price of the bond is $750, and your required rate of return is 14 percent.

a. What is the expected rate of return of the 10-year, $1,000 par value bond paying 8 percent interest annually if its market price is $750?

b. What is the value of the bond to you, given your 14 percent required rate of return?

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.

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