Question

Klondike Adventure, Inc., has outstanding $100 million bonds that pay an annual coupon rate of interest of 11 percent. Par value of each bond is $1,000. The bonds are scheduled to mature in 10 years. Because of Dooley’s increased risk, investors now require a 13 percent rate of return on bonds of similar quality. The bonds are callable at 110 percent of par at the end of 5 years.

What price would the bonds sell for assuming investors do not expect them to be called?

Hint: nper = 10 years, fv = 1000)

What price would the bonds sell for assuming investors expected them to be called at the end of 5 years?

Hint: nper = 5, fv = 1100

Excel hints: PV(rate = discount rate for each period, nper = # of coupons, pmt = coupon, fv = par, type = 0) Estimate the cash flow amount and set up of timeline.

Answer 1

1	Price assuming investors do not expect them to be called	$891.48
2	Price assuming investors expected them to be called	$983.93

Year	Cash flows
1	110
2	110
3	110
4	110
5	1210

Workings

Book1- Excel AutoSave O if Sign in Comments Share File Home Formulas Review View Help OTell me what you want to do Insert Draw Page Layout Data Σ X Insert = = A A Calibri 11 General Delete Conditional Format as Find & Cell Sort & Paste A B IU Format T T Formatting Table Filter Select Styles Clipboard Alignment Number Styles Cells Editing Font Г. Price assuming investors do not expect them to be called C1 C A В D E Price assuming investors do not expect them to be called-PV(13%,10,11 %*1000,1000) 1 2 Price assuming investors expected them to be called =-PV(13%,5,11%*1000,110%*1000) 2 4 Year Cash flows 5 =11 % * 1000 = 11 % * 1000 6 1 7 2 8 3 11 % * 1000 11 % *1000 9 4 * 1000+ 110%* 1000 - 11 % 10 5 11 12 13 14 15 16 17 Sheet4 Sheet2 Sheet1 Sheet5 Sheet3 +100 % Ready w e ENG (? 5:42 AM