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Pacific Western Corporation pays a 12 percent coupon rate on debentures due in 25 years. The...

Pacific Western Corporation pays a 12 percent coupon rate on debentures due in 25 years. The current yield to maturity on bonds of similar risk is 10 percent. The bonds are currently callable at $1,060. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds. Assume the par value of the bonds is $1,000. Use Appendix B and Appendix D.

a. Find the theoretical market value of the bonds using semiannual analysis. (Round "PV Factor" to 3 decimal places. Round the final answer to 2 decimal places.)

Price of the bond $

b. Do you think the bonds will sell for the price you arrived at in part a?

Yes Or No

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Answer #1

Answer a.

Par Value = $1,000

Annual Coupon Rate = 12.00%
Semiannual Coupon Rate = 6.00%
Semiannual Coupon = 6.00% * $1,000
Semiannual Coupon = $60

Annual Yield to Maturity = 10.00%
Semiannual Yield to Maturity = 5.00%

Time to Maturity = 25 years
Semiannual Period = 50

Market Value = $60 * PVA of $1 (5.00%, 50) + $1,000 * PV of $1 (5.00%, 50)
Market Value = $60 * 18.256 + $1,000 * 0.087
Market Value = $1,182.36

Answer b.

No, the bonds will not sell at $1,182.36 as it is higher than the call value of $1,060 which will discourage the investors.

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