Question

asset? Explain your answer in light of your findings in part a. P6-15 Basic bond valuation Complex Systems has an outstanding issue of $1,000-par value bonds with a 12% coupon rate. The issue pays interest annually and has 16 years remaining to its maturity date. a. If bonds of similar risk are currently earning a 10% rate of return, how much should the Complex Systems bonds sell for today? b. Describe the two possible reasons why the rate on similar-risk bonds is bele coupon rate on the Complex Systems bonds. c. If the required return were at 12% instead of 10%, what would the current of Complex Systems' bonds be? Contrast this finding with your findings in and discuss. v bonds is below the r findings in part a

Answer 1

Sol . As given in the question - Par Value - $1000 Coupon Rate & 12%. (p.a.). no. of years to maturity & 16 yrs. When Re & 10% . lo = Coupon x Puaf (10%, 16) + Redemption fuit (107,16) - Valie = looo X127. X 7.8237.+ 1ooo X • 2176. = 938.84 + 217.60 - $ 1156.44 NNN Note: Redemption value taken as par value. The reason why the rate on similar - risk bonds is below the coupon rate on the complex Systems bonds is because the complex System bond is. trading at a premium . ie its return is greater than the required. rate of return.

When Re = 12%. lo = +1000 X 1631 1 1000 X 12% X 6.9739 836.868 + 163. z $ 999.968. or z $ 1.000.00 When Re a CR , bonds purchase price is equal to its par value. Findinge When Re = 10%. price & $ 1156.44 , and When Re - 12% Price - $ 2000.00 this means price of the bond is - inversely proportional to the Required rate of return of the bond and When when Re he rises falls price price falls rises.