New Business Ventures, Inc., has an outstanding perpetual bond with a coupon rat
ID: 2804264 • Letter: N
Question
New Business Ventures, Inc., has an outstanding perpetual bond with a coupon rate of 9 percent that can be called in one year. The bond makes annual coupon payments. The call premium is set at $105 over par value. There is a 60 percent chance that the interest rate in one year will be 11 percent, and a 40 percent chance that the interest rate will be 6 percent. If the current interest rate is 9 percent, what is the current market price of the bond? Assume a par value of $1,000. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
New Business Ventures, Inc., has an outstanding perpetual bond with a coupon rate of 9 percent that can be called in one year. The bond makes annual coupon payments. The call premium is set at $105 over par value. There is a 60 percent chance that the interest rate in one year will be 11 percent, and a 40 percent chance that the interest rate will be 6 percent. If the current interest rate is 9 percent, what is the current market price of the bond? Assume a par value of $1,000. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Expected interest rate in one year = (60% × 11%) + (40% × 6%)
= 6.60% + 2.40%
= 9%
Expected interest rate in one year will be 9%.
Par value of bond = $1,000
Coupon rate = 9%
Annual coupon payment = $1,000 × 9%
= $90
Annual coupon payment for bond is $90.
if bond get called in one year then price of bond is calculated below:
Price of bond = ($90 + $1,000 + $105) / (1 + 9%)
= $1,195 / 1.09
= $1,096.33.
if bond get called in one year then price of bond is $1,096.33.