Zheng Enterprises, a multinational drug company specializing in Chinese medicine
ID: 2674395 • Letter: Z
Question
Zheng Enterprises, a multinational drug company specializing in Chinese medicines, issued $100 million of 15 percent coupon rate bonds in January 2005. The bonds had an initial maturity of 30 years. The bonds were sold at par and were callable in five years at 110 (i.e., 110 percent of par value). It is now January 2010, and interest rates have declined such that bonds of equivalent remaining maturity now sell to yield 11 percent. How much would you be willing to pay for one of these bonds today? Why?Explanation / Answer
How much would you be willing to pay for one of these bonds today? Why?
P0 = $150(PVIFA.11,25) + $1000(PVIF.11,25)== $1337
Value at call = $1,1000
pay $1,100 or perhaps a slight premium over that amount,but $1,337, due to the imminent risk of a call of the bonds.
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