Question

Basic bond valuation - Complex Systems has an outstanding issue of $1,000-par-value bonds with a 12% coupon interest rate. The issue pays interest annually and has

10 years remaining to its maturity date.

a.  If bonds of similar risk are currently earning a rate of return of 11%, 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 12% instead of 11%, what would the current value of Complex​ Systems' bond​ be? Contrast this finding with your findings in part a and discuss.

Answer 1

Bond Par Value = $1,000

Coupon Rate = 12% annually

Time to Maturity = 10 years

a.

YTM = 11%

Calculating Present Value,

Using TVM Calculation,

PV = [FV = 1000, T = 10, PMT = 120, I = 0.11]

Bond Value = $1,058.89

b.

Complex Systems Bond may be a less investment grade bonds so provide higher rate, or when bond was issued market rate was 12%

c.

YTM = 12%

Calculating Present Value,

Using TVM Calculation,

PV = [FV = 1000, T = 10, PMT = 120, I = 0.12]

Bond Value = $1,000

As here,

YTM = Coupon Rate bond is selling at par value.