Doug Has Been Approached by His Broker to Purchase a $1,000

question 17

Multiple Choice

Doug has been approached by his broker to purchase a $1,000 bond for $795. He believes the bond should yield 8%. The bond pays a 5% annual coupon rate and has 10 years left until maturity. What should Doug's analysis of the bond indicate to him? Use annual analysis. Use time value of money tables in Appendix B and Appendix D.

• A) The bond is undervalued; he should purchase it.
• B) The bond is undervalued; he should not purchase it.
• C) The bond is overvalued; he should purchase it.
• D) The bond is overvalued; he should not purchase it.

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Definitions:

Carbenes

Reactive molecules featuring a divalent carbon atom with only six electrons in its valence shell, making them highly reactive.

Dimerize

To undergo a chemical reaction connecting two identical molecules to form a dimer.

Alkane

Saturated hydrocarbons consisting entirely of single-bonded carbon and hydrogen atoms, with a general formula of CnH2n+2.

Hammond Postulate

A principle stating that the transition state of a chemical reaction resembles the structure of the closest stable species: the reactants for endothermic steps and the products for exothermic steps.