Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually. The required simple rate of return on this debt has now risen to 16 percent. What is the current value of this bond? (Round the answer to the nearest whole number.)

Question

Annika Hull

Business

27 May, 08:14

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually. The required simple rate of return on this debt has now risen to 16 percent. What is the current value of this bond? (Round the answer to the nearest whole number.)

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Answers (1)

Know the Answer?

Aimee Holder · Answer 1

Current value = $550

Explanation:

You can solve this question using a financial calculator. I am using (Texas Instruments BA II plus)

First, since it is Semiannual coupon, adjust the interest rate to semi-annual rate and multiply 15 years by 2 since we have 2 semi annual periods per year.

Note: If using the same calculator as me, key in the numbers first before the function.

Total duration of investment; N = 15 * 2 = 30

Interest rate; I/Y = 16% / 2 = 8%

Face value; FV = 1000

Semi annual Coupon Payment; PMT = (8%/2) * 1000 = 40

then CPT PV = $549.689

Therefore the current value of this bond is $550 (rounded to whole number.)