Anna is considering investing in a bond currently selling in the market for 875 as EURO. The bond has four years to maturity, a 1000 EURO face value and a 7% coupon rate. The next annual interest payment is due one year from today. The appropriate discount rate for the securities of similar risk is 10%.
a) Estimate the intrinsic value of the bond. Based on the result of this estimation, should Ann purchase the bond? Explain.
b) Estimate the yield-to-maturity of the bond. Based on the result of this estimation, should Ann purchase the bond? Explain.