Question

Pittsburgh Signals issued 20-year bonds one year ago at a coupon rate of 10.2 percent. The YTM is 8.2 percent. Two scenarios: 1st scenario - company fulfills its obligation, 2nd scenario - company defaults. What are the present values of 1st scenario and 2nd scenario, respectively?

a) $1,000; $900
b) $900; $1,000
c) $850; $920
d) $920; $850

Answer 1

The present value of Pittsburgh Signals' 20-year bonds in the 1st scenario is $920, and in the 2nd scenario it is $850.

Step-by-step explanation:

In order to calculate the present value of the bond in each scenario, we can use the present value formula, which takes into account the future cash flows and the discount rate. In the 1st scenario, where the company fulfills its obligation, the present value would be the sum of the present value of the bond's coupon payments and the present value of the bond's face value. In the 2nd scenario, where the company defaults, the present value would only be the present value of the bond's face value.

Using the given coupon rate of 10.2% and YTM of 8.2%, we can calculate the present value of the bond's coupon payments and face value. In the 1st scenario, the present value would be $920, and in the 2nd scenario, the present value would be $850.