Question

Complex Systems has an outstanding issue of ​$1,000​-par-value bonds with a 15​% coupon interest rate. The issue pays interest annually and has 14 years remaining to its maturity date.

a. If bonds of similar risk are currently earning a rate of return of 14​%, how much should the Complex Systems bond sell for​ today?

b. Describe the two possible reasons why the rate on​ similar-risk bonds is below the coupon interest rate on the Complex Systems bond.

c. If the required return were at 15​% instead of 14​%, what would the current value of Complex​ Systems' bond​ be? Contrast this finding with your findings in part a and discuss.

Answer 1

So the Bond must sell for $1,156.47

Step-by-step explanation:

FV -1000

PMT (Payment Per Period) -120

N 16

Rate 10.00%

PV $1,156.47

So the Bond must sell for $1,156.47

Reasons could be reduced expected inflation than when Complex issued the bonds, or possibly strong demand for bonds due an improved economy.

It he required return were 12%, the bonds would sell at par, or at 1,000.