Question

Cox Media Corporation pays a 10 percent coupon rate on debentures that are due in 20 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,150. 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.

Answer 1

The correct answer will be "1197.93".

Explanation:

According to the question:

Semi annual coupon:

=
`10 \ percent* (1000)/(2)`

=
`50`

Number of periods:

=
`20* 2`

=
`40`

Semi annual YTM:

=
`(8)/(2) \ percent`

=
`4 \ percent`

Now,

The market value of bond will be:

= PV of Coupons + PV of Par Value

On putting the values, we get

=
`50* (((1-(1+4 \ percent)^(-40)))/(4 \ percent) )+(1000)/((1+4 \ percent)^(40))`

=
`1197.93`

Note: percent = %