Bond value (LO16-2) Cox Media Corporation pays a 12 percent coupon rate on debentures that are due in 10 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,110. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds.
Find the market value of the bonds using semiannual analysis.
Present value of interest payments
〖PV〗_A=A×〖PV〗_IFA (n=20,i=4) Appendix D table
〖PV〗_A=$xx×xx.xxx
=$xxx.x
Present value of principal payment at maturity
PV=FV×〖PV〗_IF (n=20,i=4) Appendix B table
PV=$xxx×x.xxx
=$xxx
Total present value
Present value of interest payments…………………… $xxx.x
Present value of principal payment at maturity………. $xxx
$xxxx.x
b. Do you think the bonds will sell for the price you arrived at in part a? Why?
No, the call price, which is at $xxxx will prevent the bond price from exceeding $xxxx and they are presently callable. In this regard, investors will not risk purchasing bonds that go past $xxxx
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