Question

Dooley, Inc., has outstanding $150 million (par value) bonds that pay an annual coupon rate of interest of 9.5 percent. Par value of each bond is $1,000. The bonds are scheduled to mature in 17 years. Because of Dooley’s increased risk, investors now require a 13 percent rate of return on bonds of similar quality with 17 years remaining until maturity. The bonds are callable at 108 percent of par at the end of 12 years. Use calculator to find answer. Round your answers to the nearest dollar.

A). What price would the bonds sell for assuming investors do not expect them to be called? $

B). What price would the bonds sell for assuming investors expect them to be called at the end of 12 years? $

Answer 1

Answer : (a.)Calculation of Price the bonds will sell for assuming investors do not expect them to be called:

Current Market price can be calculated using PV function of Excel

=PV(rate,nper,pmt,fv)

where rate is yield to maturity or the rate of return that investor expect i.e 13%

nper is the years to maturity i.e 17

pmt is coupon payment i.e 1000 * 9.5% = 95

fv is the face value i.e 1000

=PV(13%,17,-95,-1000)

Current Bond Price is 764.48 or $764

(b.) Calculation of Price the bonds will  sell for assuming investors expect them to be called at the end of 12 years :

Current Market price can be calculated using PV function of Excel

=PV(rate,nper,pmt,fv)

where rate is yield to maturity or the rate of return that investor expect i.e 13%

nper is the years to call i.e 12

pmt is coupon payment i.e 1000 * 9.5% = 95

fv is the call price i.e 1080 (1000 * 108%)

=PV(13%,12,-95,-1080)

Current Bond Price is 811.34 or $811