Ron Rhodes calls his broker to inquire about purchasing a bond of Golden Years Recreation Corporation....

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Finance

Ron Rhodes calls his broker to inquire about purchasing a bondof Golden Years Recreation Corporation. His broker quotes a priceof $1,140. Ron is concerned that the bond might be overpriced basedon the facts involved. The $1,000 par value bond pays 12 percentannual interest payable semiannually, and has 15 years remaininguntil maturity. The current yield to maturity on similar bonds is10 percent.
a. Compute the new price of the bond.(Use a Financial calculator to arrive atthe answers. Do not round intermediate calculations. Round thefinal answer to 2 decimal places.)
New price of the bond $
b. Do you think the bond is overpriced?
No
Yes

Answer & Explanation Solved by verified expert

4.1 Ratings (492 Votes)

Solution a New price of the bond 115372 b No Notes Since actual bond price quoted is 1140 but its theoretical value of the bond calculated below is 115372 which is higher than 1140 by 1372 See Answer

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Ron Rhodes calls his broker to inquire about purchasing a bondof Golden Years Recreation Corporation. His broker quotes a priceof $1,140. Ron is concerned that the bond might be overpriced basedon the facts involved. The $1,000 par value bond pays 12 percentannual interest payable semiannually, and has 15 years remaininguntil maturity. The current yield to maturity on similar bonds is10 percent. a. Compute the new price of the bond.(Use a Financial calculator to arrive atthe answers. Do not round intermediate calculations. Round thefinal answer to 2 decimal places.)New price of the bond $b. Do you think the bond is overpriced?NoYes