You have just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. If the coupon rate is 10 percent, with annual interest payments, and there are 10 years to maturity, you should make the purchase if your re¬quired return on investments of this type is 12 percent.

Question

Quizplus · Accepted Answer

The bond is selling at a discount at $800, which means that its yield to maturity is higher than the coupon rate of 10%. If the required return on investments of this type is 12%, then buying the bond at a discount would result in a yield to maturity of more than 12%, making it a good investment. The coupon payments of 10% would be added to the return, making the total return higher than the required rate of return.

You Have Just Noticed in the Financial Pages of the Local