Question

Basic bond valuation   Complex Systems has an outstanding issue of ​$1000​-par-value bonds with a 13​% 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 rate of return of 9​%, 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 13​% instead of 9​%, what would be the current value of Complex​ Systems' bond? Contrast this finding with your findings in part a and discuss. a.  If bonds of similar risk are currently earning a rate of return of 9​%, the Complex Systems bond should sell today for     ​$ ​(Round to the nearest​ cent.) b.  Describe the two possible reasons why the rate on​ similar-risk bonds is below the coupon interest rate on the Complex Systems bond.  ​(Select the best answer​ below.)

A. Since Complex​ Systems' bonds were​ issued, there may have been a change in the​ supply-demand relationship for money or a shift in the​ investors' attitudes towards the firm. B. Since Complex​ Systems' bonds were​ issued, there may have been a shift in the​ supply-demand relationship for their product or a change in the risk towards loans.

C. Since Complex​ Systems' bonds were​ issued, there may have been a shift in the​ supply-demand relationship for money or a change in the risk towards the firm.

D. Since Complex​ Systems' bonds were​ issued, there may have been a change in the number of bonds available or a change in the coupon interest rate. c.  

If the required return were at 13​% instead of 9​%, the current value of Complex​ Systems' bond would be ​$ nothing. ​(Round to the nearest​ cent.)

Answer 1

a) Bond Price can be calculated using PV function on a calculator

N = 16, PMT = 13% x 1000 = 130, FV = 1000, I/Y = 9%

=> Compute PV = $1,332.50 should be the bond price today.

b) C is correct. One reason could be that the interest rates might have declined in the entire economy. Second reason could be the financial situation of the firm could have improved leading to higher credit ratings and lower borrowing costs.

c) If I/Y = 13% in a, then PV = $1,000