P6-15Basic bond valuation Complex Systems has an outstanding issue of $1,000-par
ID: 2671588 • Letter: P
Question
P6-15Basic bond valuation Complex Systems has an outstanding issue of $1,000-parvaluebonds 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
(a) Bond value after 16 years = 1000(1.12)^16 = 6130.394 Present value of the bond = 6130.394/(1.10)^16 = 1334 answer (b) Two reasons (i) Because of bad credit history of simila risk bonds in the market. (ii) Because of the market interest rate is lower (c) (a) Bond value after 16 years = 1000(1.12)^16 = 6130.394 Present value of the bond = 6130.394/(1.12)^16 = 1000 answer (d) The value of return curently getting from the bond is the same as the expected return so the value is equal to its par value. IN part a, the value receiving currently is more than expected, so in part a, current value is more than the face value. Happy o help
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