Doug has been approached by his broker to purchase a bond for $795. He believes the bond should yield 8%. The bond pays a 5% annual coupon rate and has 12 years left until maturity. What should Doug's analysis of the bond indicate to him? Use annual analysis.
A)The bond is undervalued; he should purchase it.
B)The bond is undervalued; he should not purchase it.
C)The bond is overvalued; he should purchase it.
D)The bond is overvalued; he should not purchase it.

Question

Quizplus · Accepted Answer

Doug's analysis should indicate that the bond is overvalued because the yield to maturity (YTM) is less than his required yield of 8%. Therefore, he should not purchase it.

Doug Has Been Approached by His Broker to Purchase a Bond