Question

Basic bond valuation Complex Systems has an outstanding issue of $1.000 por bonds with a 15% coupon interest rate The pay wrest l y and has 14 years remaning to its maturity date. a. bonds of similsk are curently coming of rum of 13 how much should the Complex Systems bond sell for today? b. Describe the two possible reasons why the wateon mankbonds is below the coupon state on the Complex Systems bond c. I the required return were at 15% stead of 13%, what would the current value of Complex Systems' bond be? Contrast this finding with your findings in part and discuss a. bonds of similar risk are currently earning a rate of return of the Complex Systems and should sell today for s o und to the newest cent) b. Describe the two possible reasons why the rate on si i s bonds is below the counterest rate on the Complex Systems bond (Select the best answer below) A. Since Complex Systems' bonds were issued, there may have been a change in the supply demand relationship for money or in the investors titudes towards the firm OB. Since Complex Systems' bonds were issued, there may have been in the supply demand relationship for money or a change in the risk towards them OC. Since Complex Systems' bonds were sued, there may have been a change in the number of bonds available or a change in the coupon interest rate OD. Since Complex Systems' bonds were issued, there may have been a shit in the supply demand relationship for the product or a change in the risk towards loans c. If the required return were at 15% instead of 13 the current value of Complex Systems' bond would be found to the newest cont the par value in contrastinata above the re When the required return is equal to the coupon rate the bond value is greater than a Select the best answers from the drop down menus) s umes than the coupon the band wiselta

Answer 1

Complex systems

a) Coupon amount =$1000 * 15% =$150

no of coupon payments =14 and one principal redemption payment

Price of bond = 150/1.13 + 150/1.13^2 + ... + 150/1.13^14+1000/1.13^14

=150/0.13*(1-1/1.13^14)+1000/1.13^14

= $1126.05  

b) The bonds having same risk may have different rates than the coupon rate of Complex sytems because after issuance, the interest rates i.e. supply and demand of money might have shifted. OR the attitude of the investors towards the firm may have changed

So, A is the best answer

c) Price of the bond when the required rate is 15%

Price of bond = 150/1.15 + 150/1.15^2 + ... + 150/1.15^14+1000/1.15^14

=150/0.15*(1-1/1.15^14)+1000/1.15^14

= $1000  

When the required rate is equal to the coupon rate, bond value is same as/equal to the par value. In contrast in part a above, if the required return is less than the coupon rate , the bond will sell at a premium (its value will be greater than par)