Question

1. One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 6.3% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

2.

CMS Corporation's balance sheet as of today is as follows:

Long-term debt (bonds, at par)	$10,000,000
Preferred stock	2,000,000
Common stock ($10 par)	10,000,000
Retained earnings	4,000,000
Total debt and equity	$26,000,000

The bonds have an 4.1% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

Select the correct answer.

a. $5,468,682

b. $5,466,583

c. $5,467,282

d. $5,469,381

e. $5,467,982

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Answer 1

(1)-Current Market price per bond

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value. The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Face Value [-$1,000]	FV	-1,000
Coupon Amount [$1,000 x 6.30%]	PMT	63
Market Interest Rate or Required Rate of Return [5.50%]	1/Y	5.50
Time to Maturity [14 Years]	N	14
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond = $1,076.72.

“Hence, the Current Price of the Bond will be $1,076.72.

(2)-Current market value of the firm's debt

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value. The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Face Value [-$1,000]	FV	-1,000
Coupon Amount [$1,000 x 4.10% x ½]	PMT	20.50
Market Interest Rate or Required Rate of Return [12.00% x ½]	1/Y	6.00
Time to Maturity [10 Years x 2]	N	20
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond = $546.9381.

Therefore, the Current market value of the firm's debt = Number of Bonds outstanding x Current price of the bond

= 10,000 Bonds x $546.9381 per Bond

= $5,469,381