Question

Basic bond valuation   Complex Systems has an outstanding issue of

​$1 000 ​-par-value bonds with a 11​% coupon interest rate. The issue pays interest annually and has 20 years remaining to its maturity date.

a.  If bonds of similar risk are currently earning a rate of return of 8​%, 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 11% instead of 8%, what would the current value of Complex​ Systems' bond​ be? Contrast this finding with your findings in part a and discuss.

Answer 1

1.
=11%*1000/8%*(1-1/1.08^20)+1000/1.08^20=1294.544422

2.
The other bonds might have higher credit rating or more liquid
The other bonds might have sinking fund, call, convertibility provision
THis bond might have put provision

3.
=11%*1000/11%*(1-1/1.11^20)+1000/1.11^20=1000
If the coupon rate is less than ytm, the bond trades at discount or less than par
If the coupon rate is more than ytm, the bond trades at premium or more than par
If the coupon rate is equal to ytm, the bond trades at par