What should be the initial price of the bond? If immediately upon issue, interes
ID: 2700960 • Letter: W
Question
What should be the initial price of the bond?
If immediately upon issue, interest rates dropped to 7 percent, what would be the value of the zero-coupon rate bond?
If immediately upon issue, interest rates increased to 10 percent, what would be the value of the zero-coupon rate bond?
2)
The Bowman Corporation has a $20 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 9 percent, the interest rates on similar issues have declined to 7.8 percent. The bonds were originally issued for 30 years and have 25 years remaining. The new issue would be for 25 years. There is an 9 percent call premium on the old issue. The underwriting cost on the new $20,000,000 issue is $660,000, and the underwriting cost on the old issue was $510,000. The company is in a 35 percent tax bracket, and it will use a 6 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.
Calculate the present value of total outflows.
Calculate the present value of total inflows.
Calculate the net present value.
A 10-year, $1,000 par value, zero-coupon rate bond is to be issued to yield 8 percent. UseExplanation / Answer
a. 1000/(1+8%)^10=$463.19
b. 1000/(1+7%)^10=$508.34
c.1000/(1+10%)^10=$385.54
Outflow =1040000 +448 864 =1488 864
Inflow 1776060+ 41244=1817304
value =328440
x 20000000= 2400000/year
before taxes = 300000 Afrer saving 300000 (1-0.35)=195000 x 9.108 =1776060
Inflow 1776060+ 41244=1817304
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