Question

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually. The face value of the bond is $1,000. The required simple rate of return on this debt has now risen to 16 percent. What is the current value of this bond?

Answer 1

The bonds now is being traded at $758.63

Step-by-step explanation:

We have to discount the coupon payment and maturity at he market rate:

Present value of the coupon payment

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

Coupon payment $1,000 x 8%/2 = 40.00

time 15 years x 2 = 30

rate 0.08

`40 * (1-(1+0.08)^(-30) )/(0.08) = PV\\`

PV $450.3113

Present value of the maturity:

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity $1,000

time 30

rate 0.04

`(1000)/((1 + 0.04)^(30) ) = PV`

PV 308.3187

PV c $450.3113

PV m $308.3187

Total $758.6300