Compute the bond's expected rate of return?

a 20-year, $1000 par value bond, paying 7 percent interest annually. The market price is $875, and your required rate of return is 10%.

Compute the bond%26#039;s expected rate of return.

Determine the value of the bond to you, given your required rate of return.

Should you sell the bond or continue to own it?

Compute the bond%26#039;s expected rate of return?

Let i = annual interest rate

Define v = 1/(1 + i)

PV of bond equals PV of coupons + PV of face value.

875 = 70*(1-v^20)/i + 1000*v^20

70*(1-v^20)/i + 1000*v^20 - 875 = 0

By trial and error, i = .0825 approximately is the expected rate of return.

At i=.1, 70*(1-v^20)/i+1000*v^20 = 745, which is less than the market price.

If you can earn 10% elsewhere, then sell the bond for 875 because if you hold it you will only earn 8.25%.