Question

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually. The face value of the bond is $1,000. The required simple rate of return on this debt has now risen to 16 percent. What is the current value of this bond?

Answer 1

Answer:

The bonds now is being traded at $758.63

Explanation:

We have to discount the coupon payment and maturity at he market rate:

Present value of the coupon payment

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

Coupon payment $1,000 x 8%/2 = 40.00

time 15 years x 2 =  30

rate 0.08

$40 \times \frac{1-(1+0.08)^{-30} }{0.08} = PV$

PV $450.3113

Present value of the maturity:

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $1,000

time  30

rate  0.04

$\frac{1000}{(1 + 0.04)^{30} } = PV$  

PV   308.3187

PV c $450.3113

PV m  $308.3187

Total $758.6300