Final answer:
To determine whether the Walmart bond is correctly priced, we need to compare its yield to the prevailing market yield for a similar bond. We can calculate the present value of the bond's future cash flows using the market yield and compare it to the bond's current price. If the present value is higher than the bond's price, it is underpriced; if it is lower, it is overpriced.
Step-by-step explanation:
In order to determine whether the Walmart bond is correctly priced by the market, we need to compare its yield to the prevailing market yield for a similar bond. The market prevailing yield for a similar bond is given as 3.4%. We can calculate the present value of the Walmart bond's future cash flows using this yield and compare it to the bond's current price. If the present value of the future cash flows is equal to or higher than the bond's current price, then the bond is correctly priced.
Let's assume the Walmart bond makes annual coupon payments of $100 and has a face value of $1000. The bond matures in 2030, and we are evaluating its price in February 2019. To calculate the present value, we need to discount the future cash flows by the yield of 3.4%. The present value of each coupon payment can be calculated using the formula PV = C / (1 + r)^n, where PV is the present value, C is the coupon payment, r is the yield rate, and n is the number of years until the payment. Adding up the present value of all the cash flows will give us the total present value of the bond. If the total present value is higher than the bond's current price, then the bond is underpriced, and if it is lower, then the bond is overpriced.