Question

Cox Media Corporation pays a coupon rate of 10 percent on debentures that are due in 15 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,100. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.a. Find the market value of the bonds using semiannual analysis. (Ignore the call price in your answer. Do not round intermediate calculations and round your answer to 2 decimal places.)b. Do you think the bonds will sell for the price you arrived at in part a?

Answer 1

a. Find the market value of the bonds using semiannual analysis.

bond's price = PV of maturity value + PV of coupon payments

• PV of maturity value = $1,000 / (1 + 4%)³⁰ = $308.32
• PV of coupon payments = $50 x 17.292 (annuity factor 4%, n = 30) = $864.60

bond's price = $1,172.92

b. Do you think the bonds will sell for the price you arrived at in part a?

No, since they are currently callable at $1,100, their market price will be the call price. No investor will risk to pay more for a bond that can be called at a much lower price.