Question

A Bethlehem Steel Corporation $1000, 9% debenture is due on May 15, 2000. Interest is payable on May 15 and November 15. The Bond may be called at 104 on May 15, 1994.

Find the value of the bond on May 15, 1990, if the yield rate is to be 10% converted semiannually, assuming:

(a) The bond is called at 104 on May 15, 1994

(b) The bond is redeemed at par on May 15, 2000

Answer 1

Solution:

In this question we have to compute the present value of bond's cash flows in two different situations. First situation is, when bond is being called at $ 104 on May 15, 1994 i.e. after 4 years and second situation is when bond is being redeemed at par on May 15, 2000 i.e. after 10 years of life.

In both the above situation, we have different cash flows for different time period hence we have to compute the present value of bond differently.

Here, adjusted discount rate is given and which is 10% semiannually.

(a) Bond value when the bond is called at $ 104 on May 15, 1994

Value = {Cash Flow (Interest) x PVAF (10%, 8 semiannual)} + {Call Price x PVAF (10%, 8 semiannual)}

Value = {$ 45 x 5.33493} + {$ 104 x 0.46651}

Value = $ 288.60

(b) Bond value when the bond is redeemed at $ 100 on May 15, 2000

Value = {Cash Flow (Interest) x PVAF (10%, 20 semiannual)} + {Redeem Price x PVAF (10%, 20 semiannual)}

Value = {$ 45 x 8.51356} + {$ 100 x 0.14864}

Value = $ 397.98