Question

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 16 years remaining to its maturity date. a. If bonds of similar risk are currently earning a 10% rate of return, 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 7%, what would the current value of Complex Systems

Answer 1

We shall use financial calculator for the same:
a)

N	16
I/Y	10.0000%
FV	1,000.00
PMT	$               120.00	(12%*1000)
CPT PV	$           1,156.47

Hence the bonds shall sell for $1,156.47

b)

The two reasons may be:

When the bond were issued, macroeconomic outlook may have been good but has deteriorated now.

The outlook for the Complex systems may have improved due to better product or market positioning and thus it commands a lesser risk premia.

c) Part c is a bit unclear hence I am calculating for both 7% and 12%:

at 12%:

N	16
I/Y	12.0000%
FV	1,000.00
PMT	$               120.00
CPT PV	$           1,000.00

at 7%:

N	16
I/Y	7.0000%
FV	1,000.00
PMT	$               120.00
CPT PV	$           1,472.33