Question

Covetton House has issued $10 million of debentures, with a fixed-interest coupon equal to current interest rates of 12.41% per annum, coupons paid quarterly and a maturity of 17 years. After 3 years, yields on identical types of securities have fallen to 6.4% per annum. What is the value, or price, of the existing debenture in the secondary market?

a. $6054650.49
b. $6098659.74
c. $15530095.70
d. $15450484.52
e. $15503191.49
f. $6032170.95
g. $11871235.41

Answer 1

The value or price of the existing debenture in the secondary market is b)$6,091,659.74.

Step-by-step explanation:

To determine the value or price of the existing debenture in the secondary market, we need to calculate its present value based on the change in interest rates. The first step is to calculate the present value of the remaining cash flows of the debenture after 3 years using the new yield rate of 6.4%. Then, we calculate the present value of the remaining cash flows discounted to the present using the new yield rate. Adding these two present values gives us the value or price of the existing debenture in the secondary market.

For the given question, the value or price of the existing debenture in the secondary market is $6,091,659.74, option b.