You own a 20-year, $1000 par value government bond paying 7 percent interest annually. The current market price of the bond is $875 and assume that your required rate of return is 10 percent.
a) Suppose that the bond will mature in 5 years and that you will keep it until it matures. How much will you get from the government when it matures?
b) Compute the bond’s “expected rate of return” at the present time.
c) Determine the value of the bond to you given your required rate of return of 10 percent.
d) Should you sell the bond right now or continue to own it? Why?