Question

Basic bond valuation Complex Systems has an outstanding issue of $1,000-par-value bonds with a 16% coupon interest rate. The issue pays interest annually and has 13 years remaining to its maturity date. a. If bonds of similar risk are currently earning a rate of return of 8%, how much should the Complex Systems bond sell for today? b. Describe the two possible reasons why the rate on similar-risk bonds is below the coupon interest rate on the Complex Systems bond. c. If the required return were at 16% instead of 8%, what would the current value of Complex Systems' bond be? Contrast this finding with your findings in part a and discuss.

Answer 1

1.
=1000*16%/8%*(1-1/1.08^13)+1000/1.08^13
=1632.30208

2.
Callable provision
No sinking fund provision
Bond seniority

3.
=1000*16%/16%*(1-1/1.16^13)+1000/1.16^13=1000.00000

If required return is equal to coupon rate, price is equal to par. As the required return increases price decreases