You have just noticed in the financial pages of the local newspaper that you can buy a bond ($1,000 par)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 required return on investments of this type is 12 percent.

Question

Quizplus · Accepted Answer

The bond is currently being sold at a discount ($800 instead of $1,000), which means the yield to maturity is higher than the coupon rate. If the required return on investment is 12%, which is higher than the coupon rate of 10%, then buying the bond at a discounted price and earning the 10% coupon payments would result in a return higher than 12%. Therefore, it would be a good investment decision to purchase the bond.

You Have Just Noticed in the Financial Pages of the Local