have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800 The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value You should buy the bond if your required return on bonds with this risk is 12%.

Question

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The bond is selling at a discount ($800 for a $1,000 bond), which means the effective yield (or required return) is higher than the coupon rate. If your required return is 12%, and you can purchase a bond with a 10% coupon rate for $800, then you should buy it because it provides a yield higher than your required return. Additionally, because the bond will mature in 10 years and pay off its par value, you will also receive the capital appreciation from the bond returning to its par value.

Have Funds That You Want to Invest in Bonds, and You