Cox Media Corporation pays a coupon rate of 9 percent on debentures that are due
ID: 2741776 • Letter: C
Question
Cox Media Corporation pays a coupon rate of 9 percent on debentures that are due in 15 years. The current yield to maturity on bonds of similar risk is 6 percent. The bonds are currently callable at $1,120. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Find the market value of the bonds using semiannual analysis. (Ignore the call price in your answer. Do not round intermediate calculations and round your answer to 2 decimal places.) Price of the bond $ b. Do you think the bonds will sell for the price you arrived at in part a? Yes No
Explanation / Answer
A. Present value of interest payments:
PVA= A × PVIFA(n = 30, i = 3%)
PVA= $45 × 19.600 = $882.00
Note: Please refer Appendix D
Present value of principal payment at maturity
PV = FV × PVIF(n = 30, i = 3%)
PV = $1,000 × .412 = $412
Note: Please refer Appendix B
Total present value: $ 882 +$412 = $1,294
B. No. The call price of $1,120 will keep the bonds from getting much over $1,120. Since the bonds are currently callable,investors will not want to buy the bonds at almost $1,300 and risk having them called away at $1,120.