Problem:
A 2-year bond pays 5 percent interest annually on a $1,000 par value. The market price of the bond is $1,075 and your required rate of return is 7 percent.
Required:
Question: What is your expected rate of return (yield to maturity)?
Question: Determine the value of the bond to you, given the required rate of return. Should you purchase the bond?
Question: What if the bond's market price is $875?
Note: Be sure to show how you arrived at your answer.