A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9%. By how much is the bond mispriced?

Question

Quizplus · Accepted Answer

To find out if a bond is mispriced, we need to calculate its fair value using its cash flows and the required rate of return. In this case, the bond pays annual interest of $100 for 10 years and returns its face value of $1,000 at maturity. Using a financial calculator or Excel, we can find that the fair value of the bond is $1,064.18. Since the market price is only $1,050, the bond is underpriced by $14.18. Therefore, the answer is C, underpriced by $14.18.

A 10-Year Annual Payment Corporate Bond Has a Market Price