Question

Sunland, Inc., has a bond issue maturing in seven years that is paying a coupon rate of 8.5 percent (semiannual payments). Management wants to retire a portion of the issue by buying the securities in the open market. If it can refinance at 7.0 percent, how much will Sunland pay to buy back its current outstanding bonds?

(Round answer to 2 decimal places, e.g. 15.25.)

Sunland will pay

$

Answer 1

Solution - Buy back Price = $1081.90 (Since the par amount is not given in question hence we will assume it as $1000)

buy back Price will be calculated by discounting all the remaining coupon payments and par amount at maturity by 7%.

coupon amount = 8.5% of 1000 / 2 = $42.50

Remaining Periods = 7 years / 2 = 14 Periods

Half Yearly Rate = 7 / 2 = 3.5%

Therefore :-

buy back Price = (42.50 / 1.035)1 + (42.50 / 1.035)2 + (42.50 / 1.035)3 + (42.50 / 1.035)4 + (42.50 / 1.035)5 + (42.50 / 1.035)6 + (42.50 / 1.035)7  +  (42.50 / 1.035)8 + (42.50 / 1.035)9 + (42.50 / 1.035)10 + (42.50 / 1.035)11 + (42.50 / 1.035)12 + (42.50 / 1.035)13 + (42.50 / 1.035)14 + (1000 / 1.035)14

buy back Price = $41.06 + $39.674 +$38.333 +$37.036 + $35.784 +$34.574 + $33.40 + $32.275 + $31.184 + $30.129 + $29.11 + $28.126 + $27.175 +$26.256 + $617.782

buy back Price = $1081.90

Note - If par amount is assumed $100 then take Coupon as $4.25 & Par Amount as $ 100 . Therefore buy back price will be $108.19.