Corporate bonds are simply bonds that are issued by corporations to fund their o
ID: 1174385 • Letter: C
Question
Corporate bonds are simply bonds that are issued by corporations to fund their operations. A company that wants to raise cash can either sell a share of itself by issuing stock or take on debt by issuing bonds. Let's assume that you have been receiving annual payments of $540 on the bond from $8,000 in a corporate bond. You made this investment twelve years ago. For the next three years, you will continue to receive annual payments of this same amount, after which time you will also receive a payment equal to your initial investment as your final payment. Suppose another investor is interested in purchasing the bond from you. If the current rate of interest for similar investments is 7 percent, how much should be the minimum price you should accept for the bond?
Instructions: Round your answer to the nearest dollar. Do not round intermediate calculations for (1 + i)t.
Explanation / Answer
Since, the coupon on the bonds = 6.75% which is lower than the tikeld on imilar bond 7%, the current value of he bond wil beless than 8,000.
Value of the bond today = 540 * PVAF(7%,3y) + 8,000 * PVF(7%,3y)
= 540 * 2.624 + 8,000 * 0.816 = 7,947.514
The minimum price to be accepted for the bond = $7,947.514