Question

A corporate bond has a coupon rate of 5.5 percent, a $1,000 face value, and matures three years from today. The corporation is in a serious financial situation and has announced that no future annual interest payments will be paid and that the probability the entire face value will be repaid is only 75 percent. If the entire face value cannot be paid, then 60 percent of the face value will be repaid. All payments will be made three years from now. What is the current value of this bond at a discount rate of 15 percent?

Answer 1

Answer:

$= \frac{\frac{75}{100}\times 1000 + \frac{25}{100} \times \frac{60}{100}\times 1000 }{(1+\frac{15}{100})^3 }$

$=\frac{0.75\times 1000 + 0.25\times 0.60 \times 1000}{(1+0.15)^3}$

$=\frac{750+0.25\times 0.60\times 1000}{1.15^3} \\\\=\frac{750+150}{1.520875} =\frac{900}{1.520875} \\\\=591.76$

Step-by-step explanation:

= (probability of entire face value paid*face value+probability of entire face value not paid*percent of face value paid*face value)/(1+discount rate)^years to maturity

probability of entire face value paid = 75%

face value = 1000

probability of entire face value not paid = 25%

percent of face value paid= 60%

discount rate = 15%

years to maturity  = 3

$= \frac{\frac{75}{100}\times 1000 + \frac{25}{100} \times \frac{60}{100}\times 1000 }{(1+\frac{15}{100})^3 }$

$=\frac{0.75\times 1000 + 0.25\times 0.60 \times 1000}{(1+0.15)^3}$

$=\frac{750+0.25\times 0.60\times 1000}{1.15^3} \\\\=\frac{750+150}{1.520875} =\frac{900}{1.520875} \\\\=591.76$