Question

Basic bond valuation. Complex Systems has an outstanding issue of 1,000​-par-value bonds with a 16​% coupon interest rate. The issue pays interest annually and has 11

years remaining to its maturity date.

a. If bonds of similar risk are currently earning a rate of return of 14​%, how much should the Complex Systems bond sell for​ today?  

b. Describe the two possible reasons why the rate on​ similar-risk bonds is below the coupon interest rate on the Complex Systems bond.

c. If the required return were at 16​% instead of 14​%, what would the current value of Complex​ Systems' bond​ be? Contrast this finding with your findings in part a and discuss.

Answer 1

1.
=1000*16%/14%*(1-1/1.14^11)+1000/1.14^11=1109.05466046129

2.
Because this bond might be unsecured, other bonds might be secured
Because this bond might be subordinated
Because this bond might have higher default or liquidity risk

3.
=1000*16%/16%*(1-1/1.16^11)+1000/1.16^11=1000

Bond price is inversely proportional to required return
If coupon rate is equal to required return, the price is equal to par
If coupon rate is more than required return, the price is more than par
If coupon rate is less than required return, the price is less than par