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ioda
3 years ago
9

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluatio

n. 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?
Business
1 answer:
Veronika [31]3 years ago
4 0

Answer:

The bonds now is being traded at $758.63

Explanation:

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

<em><u>Present value of the coupon payment</u></em>

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

<u><em>Present value of the maturity:</em></u>

\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

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