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Bond value: quoted price is $1180; Jim thinks the bond might be overpriced

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Please help with the following problem.

Cost of a bond: His broker quoted a price of $1,180. Jim is concerned that the bond might be overpriced based on the facts involved.

The $1,000 par value bond pays 14 percent interest, and it has 25 years remaining until maturity. The current yield to maturity on similar bonds is 12 percent. Compute the new price of the bond and comment on whether you think it is overpriced in the marketplace.

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Solution Summary

The solution explains how to determine if a bond is overpriced and then gives the formula for a solution. Rather than do the math by hand, a link is provided to a bond calculator. The last paragraph comments on the solution.

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Problem: The $1,000 par value bond pays 14 percent interest, and it has 25 years remaining until maturity. The current yield to maturity on similar bonds is 12 percent. Compute the new price of the bond and comment on whether you think it is overpriced in the marketplace.

Solution:

The value of a bond is the present value of its ...

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