Question

Jane Thorpe has been offered a seven-year bond issued by Barone, Inc., for a price of $943.22. The bond has a coupon rate of 9 percent and pays the coupon semiannually. Similar bonds in the market have a yield to maturity of 10 percent today. Should she buy the bonds at the offered price? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

A) Yes, the bond is worth more at $1,015.
B) No, the bond is only worth $921.
C) Yes, the bond is worth more at $951.
D) No, the bond is only worth $912.

Answer 1

No, the bond is only worth $912.

Step-by-step explanation:

The student should not buy the bonds at the offered price. The bond is only worth $912, which is less than the offered price of $943.22. This is because the yield to maturity of similar bonds in the market is 10 percent, while the coupon rate of this bond is 9 percent. When interest rates rise, bonds previously issued at lower interest rates will sell for less than face value.