Junk Corp.\'s high-yield bond has the following features: Principal $1,000 Coupo

Question

Junk Corp.'s high-yield bond has the following features:
Principal                 $1,000
Coupon                        10%
Maturity                         5 years
Special features: Company may extend the life of the bond to 10 years

a.If interest rates are currently 12 percent on comparable high-yield securities and are not expected to change, what is the price of this bond?

b. If interest rates are currently 9 percent on comparable high-yield securities and are not expected to change, what is the price of this bond?

c. If interest rates are currently 9 percent on comparable high-yield securities but the investor has no forecast as to future rates, what is the possible range of prices for this bond?

Explanation / Answer

ANSWER:

(a) (120*3.604) + (1000*0.567) = 999.48

(B) (90*3.889) + (1000*0.649) =999.01

(c)RANGE 999.01 - 1999.01

tHANKS

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