Complex Systems has an outstanding issue of $1,000-par-value bonds with a 12% co
ID: 2668577 • Letter: C
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 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 10%, what would the current value of Complex Systems’ bonds be? Contrast this finding with your findings in part a and discuss.
Explanation / Answer
A.) $1,156.47 PV of $1000 = 217.63 PV of $120 for 16 years = 938.85 Bond should sell for $1,156.47 B.) The stated rate on a bond is usually the effective or market rate at the time the bond debenture was written. Therefore, two similarly risky bonds issued at different dates can very easily have different stated rates. Thus, the timing of the bond issuance and the duration to maturity of the bond can affect the bond price and yield. C.) $1,000 PV of $1000 = $163.12 PV of $120 = $836.88 Bond should sell for $1,000.00 In part A, the bond is selling at apremium since its stated rate is higher than the market. When the rates are equal, the bond should sell at face value.
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