Final answer:
The price of a Webley Corp bond issued at a 12% coupon rate with 30 years until maturity should be calculated by discounting the bond's future cash flows, which include the annual coupon payments and the principal repayment, at the current market yield of 8%.
Step-by-step explanation:
The subject of the question is to determine the current price of a Webley Corp bond that was issued at a 12% coupon rate with 30 years to maturity when the current market yield for comparable bonds is 8%. This requires understanding the relationship between yields and bond prices and applying the principles of present value to find the price at which the bond should sell today.
To calculate the price of the bond, we must discount the future cash flows from the bond (the annual coupon payments and the lump-sum principal repayment at maturity) at the current market yield of 8%. The annual coupon payment is calculated as 12% of the $1,000 face value, which gives us $120 per year. Since the bond has 30 years left until maturity, we discount 30 years' worth of $120 payments plus the $1,000 principal repayment at the 8% market yield.
The formula for the present value of an annuity (the coupon payments) is PV = C * [(1 - (1 + r)^-n) / r], where PV is the present value, C is the annual coupon payment, r is the market yield (expressed as a decimal), and n is the number of years to maturity. For the final principal repayment, the present value is calculated as F / (1 + r)^n, where F is the face value of the bond.
Therefore, the bond's price is the sum of the present value of all coupon payments and the present value of the principal repayment.