Question

McClaren Motors just issued a series of $1000000 bonds with 10-year maturity and an 8% coupon rate, paid quarterly. If you purchase a McLaren bond at a price of $920 what is your required rate of return?

Answer 1

To calculate the required rate of return on the McLaren bond, use the formula for bond yield: Bond Yield = (Coupon Payment + (Face Value - Price)) / Price. Plugging in the values: Bond Yield = (0.08 * $1,000) + (($1,000 - $920) / $920. The required rate of return is approximately 12%.

Step-by-step explanation:

To calculate the required rate of return on the McLaren bond, we can use the formula for the bond yield. In this case, the bond has a face value of $1,000, a coupon rate of 8%, a maturity of 10 years, and a price of $920.

We can use this formula:

Bond Yield = (Coupon Payment + (Face Value - Price)) / Price

Plugging in the values:

Bond Yield = (0.08 * $1,000) + (($1,000 - $920) / $920

Simplifying, the required rate of return is approximately 12%.