A bond with a $1000 par value has three years before it matures. It was issued w

Question

A bond with a $1000 par value has three years before it matures. It was issued with a 9% coupon. Since the bonds were issued, interest rates have fallen and bonds of similar risk are now offering only 7%. The offering price on the bond is $1,100. Is that price higher or lower than the value of the bond in today’s market?

Suppose operating costs are now $125,000 for either the 100% equity or 50/50 scenario. What is the return on equity for each scenario? 3. Company A has identified the cost of equity and the after tax cost of debt depending on the level of each used. Which of the four scenarios offers the lowest corporate cost capital Percent Cost ofCost of EquityEquity (%)Debt (%) 100 10 0 75 11 5 50 12 8 25 13 9

Explanation / Answer

Bond Value = C/2 {[1-(1+(YTM/2))-2t/(YTM/2)] + [F / (1+ (YTM/2))2t]
(we assume that the coupon payment is made semi-annually)

B0 = the bond price,
C = the annual coupon payment, => $1,000 x 9% = $90
F = $1,000
YTM = the yield to maturity on the bond, (also known as required rate) = 7%
t = the number of years remaining until maturity = 3

Bond Value = $90/2 {[1-(1+(0.07/2))-6/(0.07/2)] + [$1,000 / (1+ (0.07/2))6] = $1,053

So, the price offered in the market is higher than its intrinsic value.

The data for the second question is insufficient. Please provide the data.

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