Basic bond valuation Complex Systems has an outstanding issue of $1,000-par-valu

Question

Basic bond valuation Complex Systems has an outstanding issue of $1,000-par-value bonds with a 13% coupon interest rate. The issue pays interest annually and has 18 years remaining to its maturity date. a. If bonds of similar risk are currently earning a rate of return of 12%, how much should the 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 13% instead of 12%, what would be the current value of Complex Systems' bond? Contrast this finding with your findings in part a and discuss.

Explanation / Answer

a FV 1000 PMT 130 (1000 x 13%) NPER 18 Rate 12% PV ($1,072.50) =PV(12%,18,130,1000) Bond should sell for $1072.50 today, at premium b B Since Complex Systems' bonds were issued, there may have been a shift in the supply-demand relationship for money or a change in the risk towards the firm. c FV 1000 PMT 130 (1000 x 13%) NPER 18 Rate 13% PV ($1,000.00) =PV(13%,18,130,1000) Coupon return = Market return Sell at par Coupon return > Market return Sell at premium

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