Question

Two years ago, Jetblue Airlines sold a $250 million bond issue to finance the purchase of new jet airliners. These bonds were issued in at par value with an original maturity of 12 years and a coupon rate of 12%.

Determine the value today of one of these bonds to an investor who requires a 14% rate of return on these securities.

Is it a discount or premium bond and why?

How did you calculate at par value?

Answer 1

Bond valuation is the determination of the fair price of a bond. As with any security or capital investment, the expected value of a bond is the present value of the stream of cash flows it is expected to generate. Hence, the value of a bond is obtained by discounting the bond's expected cash flows to the present using an appropriate discount rate.

Value of the bond after 2 years using the financial calculator:
Feed N = 10

PMT = 12

FV = 100

IY = 14

Compute PV we get 89.57

Hence for 100 value bond, bond will trade at discount

When the bond was issued it was issued at par, the reason is that the expected return for the investor would have been the same of 12% equal to coupon. Hence when the future cash flows are discounted at the same coupon rate, bond will trade at par