Ablemarle Energy recently raise (borrowed) $50 million by issuing an innovative

Question

Ablemarle Energy recently raise (borrowed) $50 million by issuing an innovative new bond that is being referred to as a “Biennial” bond. The Biennial bonds, which have a par value of $1000, make an interest payment of $100 once every two years in perpetuity, so that the principal amount of the bond is never (not ever) returned to the bondholders. Assuming that there are two years until the next biennial coupon payment of $100 and that the required yearly rate of return on the Biennial bonds is 4.2 percent, determine the current value of one (and only one) of the Biennial bonds issued by Ablemarle Energy.

Explanation / Answer

Answer: Value of 1 bond=(100/2)/4.2%

=$1190.47619

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