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ludmilkaskok [199]
3 years ago
6

Longley Trucking is issuing a 20-year bond with a $2,000 face value tomorrow. The issue is to pay an 8% coupon rate, because tha

t was the interest rate while it was being planned. However, rates increased suddenly and are expected to be 9% when the bond is marketed. What will Longly receive for each bond tomorrow
Business
1 answer:
Katen [24]3 years ago
7 0

Answer:

Longly will receive $1,817.43 from selling the bond.

Explanation:

As the coupon rate is 8%; we have annual coupon payment = 2,000 x 8% = $160.

The price of the bond Longly will receive is equal to the present value of 20 annual coupon payment plus the present value of $2,000 face value repayment in 20 years time; with the two streams of cash flow discounting at the market rate at the date of issuing 9%; which is calculated as:

[ ( 160/9%) x [ 1 - 1.09^(-20) ] ] + ( 2,000 / 1.09^20 ) = $1,817.43.

So, the answer is $1,817.43.

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