Question

Several years ago, Central Penn Brewing issued bonds in order to raise capital. The bonds have a maturity of 10 years, and a par value of $1,000.00. These bonds paid a cash coupon of $10.00 semi-annually. In addition to the cash payment, each period bond holders are entitled to one keg of Central Penn’s “Bonded Brown Ale” ™, which is payable at the same time as the cash payment. (The total payment each period will be cash, plus one keg of beer.)

If the bonds are currently priced at $925.61, and have a yield to maturity of 6%, what value do investors place on each keg of beer? (Not the total value of all kegs.)

Answer 1

Value investors place on each keg of Beer = (Current Price of Bond - Price of Bond excluding Beer Value) / 20 periods

Value investors place on each keg of Beer = (925.61 - 702.45) / 20 periods

Value investors place on each keg of Beer = $11.16 per Keg of Beer

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