Question
In which of the following situations is it advisable for
an investor to buy a bond?Solution
An investor should buy a bond when its intrinsic value (the calculated fair value based on expected cash flows, interest rates, and risk) is greater than its current market value. • This indicates the bond is undervalued by the market. • Over time, the market price is likely to adjust upwards toward its intrinsic value, allowing the investor to realize capital gains. In contrast: • If Intrinsic Value < Market Value, the bond is overpriced, making it unattractive. • Redemption value comparisons are relevant at maturity but do not directly determine immediate investment decisions. Thus, the best case for purchase is when Intrinsic Value > Market Value.
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