Seventeen years ago, Rickety Airlines sold an $800 million bond issue to finance

Question

Seventeen years ago, Rickety Airlines sold an $800 million bond issue to finance the purchase of new jet airliners. These bonds were issued in $1,000 denominations with an original maturity of 20 years and a coupon rate of 6.00%. (Show all calculations.) Determine the value today of one of these bonds to an investor who requires a 12.00% rate of return on these securities. Determine the value today of one of these bonds to an investor who requires a 4.00% rate of return on these securities. Determine the value today of one of these bonds to an investor who requires a 15.00% rate of return on these securities. Describe the relationship between an investors required return and valuation of a bond.

Explanation / Answer

Par Value Interest Issue Price of Bond 1000 60 Interest Required Rate Value of Bond Value of Bond 60 12% 500 (60/0.12) Value of Bond 60 4% 1500 (60/0.04) Value of Bond 60 15% 400 (60/0.15) If required rate is more than the coupon rate then value of the bond is less than its par value If required rate is less than the coupon rate then value of the bond is more than its par value

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.