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The bonds of Geonosis Corp. carry a 4% coupon rate and mature in 16 years. Bonds of equivalent risk yield 5%. What is the market value (current price) of Geonosis' bonds?

User Sheena
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To calculate the market value (current price) of Geonosis Corp.'s bonds, we need to use the concept of present value. The present value is the current worth of future cash flows, discounted at the required rate of return.

Step 1: Calculate the present value of the bond's future cash flows. The bond has a 4% coupon rate, which means it pays 4% of its face value as annual interest. Since the bond matures in 16 years, it will make 16 coupon payments. To calculate the present value of these cash flows, we need to discount each payment back to the present using the required rate of return. In this case, the required rate of return is 5%.

Step 2: Calculate the present value of the face value. At maturity, the bond will also repay the face value. So we need to calculate the present value of this future cash flow as well. Step 3: Sum up the present values of the coupon payments and face value. Once we have calculated the present values of the coupon payments and the face value, we can sum them up to get the market value of the bond.

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