Question

Two years ago, Trans-Atlantic Airlines sold a $250 million bond issue to finance the purchase of new jet airliners. These bonds were issued in $1000 denominations with an original maturity of 12 years and a coupon rate of 12%. Determine the value today of one of these bonds to an investor who requires a 14% rate of return on these securities.

Answer 1

The investor will pay up to $ 985.68

Step-by-step explanation:

The market value of the bonds will be the discounted value of the coupon payment and maturity at discount rate of 14% which the investor requires

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

Coupon payment: 1,000 face value x 12% = 120

time to maturity: 12 years bond issued 2 years = 10 years

rate 0.14

`120 * (1-(1+0.14)^(-10) )/(0.14) = PV\\`

PV $625.9339

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 1,000.00

time 10 years

rate 0.14

`(1000)/((1 + 0.14)^(10) ) = PV`

PV 269.74

PV coupon payment 625.94 + PM maturity $269.74 = $985.68