Question

Basic bond valuation Complex Systems has an outstanding issue of$1,000 par value bonds with a 8% 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 7%, how much should the Complex Systems bond sel 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 8% instead of 796, what would the current value of Complex Systems' bond be? Contrast this finding with your findings in part a and discuss. alfbonds of similar risk are currently earning a rate of return of 7%, the Complex Systems bond should sell today for S (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.) OA. 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. O 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. O C. 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. O D. Since Complex Systems' bonds were issued there may have been a shift in the supply dennand relationship for money or a change in the risk towards the firm. c. If the required return were at 8% instead of 7%, the current value of Complex Systems' bond would be $ When the required return is equal to the coupon rate, the bond value is the coupon rate, the bond will sell at a (Round to the nearest cent) the par value. In contrast in part a above, if the required return is less than (its value will be greater than par). (Select the best answers from the drop-down menus.)

Answer 1

a. Answer: $1070.24

Selling price of bond = [($1000 x 8%) x PVA(i=7%, n=10)] + [$1000 x PV(i=7%, n=10)]

Selling price of bond = ($80 x 7.02358) + ($1000 x 0.50835) = $561.8864 + $508.35 = $1070.2364 = $1070.24

b. Answer: 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.

c. Answer: $1000

Selling price of bond = [($1000 x 8%) x PVA(i=8%, n=10)] + [$1000 x PV(i=8%, n=10)]

Selling price of bond = ($80 x 6.71008) + ($1000 x 0.46319) = $536.8064 + $463.19 = $999.9964 = $1000

When the required return is equal to the coupon rate, the bond value is equal to the par value. In contrast in part a above, if the required return is less than the coupon rate, the bond will sell at a premium (its value will be greater than par).

Note: Kindly select appropriately from the drop-down menus since the same have not been provided with the question.