Question

Cox Media Corporation pays an 11 percent coupon rate on debentures that are due in 20 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,200. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. Find the market value of the bonds using semiannual analysis. (Ignore the call price in your answer. Do not round intermediate calculations and round your 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

• No

Answer 1

(a)-The market value of the bonds using semiannual analysis

• 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
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 11.00% x ½]	PMT	55
Market Interest Rate or Yield to maturity on the Bond [8.00% x ½]	1/Y	4.00
Maturity Period/Time to Maturity [20 Years x 2]	N	40
Bond Price/Current market price of the Bond	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 (PV) = $1,296.89.

“Hence, the Price of the Bond will be $1,296.89”

(b)-“NO”. We do not sell the Bond for the price arrived at in part a. Because the call price of the Bond ($1,200) is less than the current market price of the Bond ($1,296.89).