Basic Bond Valuation: Complex Systems has an outstanding issue of $1,000-par-val
ID: 2677761 • Letter: B
Question
Basic Bond Valuation: Complex Systems has an outstanding issue of $1,000-par-value bonds with a 12% coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date. A. If bonds of similar risk are currently earning a 10% rate of return, how much should the Complex Systems bond sell for today? B. Describe the two possible reasons why the rate on similar-risk bonds is below the coupon interest rate on the Complex Systems bond. C. If the required return were at 12% instead of 10%, what would the current value of Complex Systems' bond be? Contrast this finding with your findings in part A and discuss.Explanation / Answer
FV
-1000
PMT (Payment Per Period)
-120
N
16
Rate
10.00%
PV
$1,156.47
So the Bond must sell for $1,156.47
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Two possibel reason could be
1) The current real interest rate is 10%
2) Credit rating of similar bond is higher (that is they are less risky).
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FV
-1000
PMT (Payment Per Period)
-120
N
16
Rate
12.00%
PV
$1,000.00
If the required return is 12% then current value of bond will trade at $1,000.
The current value of bond at 12% is lower than the current value at 10%.
Also when the coupon rate of then bond is higher than the required return then the bond is
more valueable (than it face value) but when coupon rate is same as required rate the price
of the bond is same as face value
FV
-1000
PMT (Payment Per Period)
-120
N
16
Rate
10.00%
PV
$1,156.47
So the Bond must sell for $1,156.47