Question

Basic bond valuation   Complex Systems has an outstanding issue of 1,000​-par-value bonds with a 14​% coupon interest rate. The issue pays interest annually and has17

years remaining to its maturity date.

a.  If bonds of similar risk are currently earning a rate of return of 99​%, 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 14​% instead of 99​%, what would the current value of Complex​ Systems' bond​ be? Contrast this finding with your findings in part a and discuss.

Answer 1

A:

Using financial calculator

Input: FV= 1000

PMt = 14%*1000 = 140

N = 17

I/Y = 9.9

Solve for PV = -1,330.93

Price of the bond = $1330.93

B: 1: This could be due to lower interest rate in the market as a whole.

2: The lower rate could be due to recessionary expectations in future.

C: Current price will be $1000 if the required rate is equal to the coupon rate.

This is because the bond is paying same rate as market expectations and so its price will be equal to the par value.