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

Question

Quizplus · Accepted Answer

Doug's analysis should indicate that the bond is overvalued because the yield he desires (8%) is higher than the bond's coupon rate (5%). If the bond is priced at $795, it suggests that the market yield is higher than the coupon rate, but Doug's required yield is still not met, indicating the bond is overvalued for his desired yield.

Doug Has Been Approached by His Broker to Purchase a Bond