A Chiquita Brands International, Inc. bond with a face value of $1,000 is currently selling at...

A Chiquita Brands International, Inc. bond with a face value of $1,000 is currently selling at a price of $1,010. It has a coupon rate of 6% and matures in 2025.

What price would you be willing to pay for the bond if your discount rate is 5%?

Solutions

Expert Solution

Assumption: The coupon is paid annually

In this question, we need to calculate the intrinsic value of bond given. Intrinsic value of a bond is present value (discounted at required rate of return or required yield or YTM or current market interest) of all cashflows associated with the bond - namely coupons and face value.

Price of a bond is mathematically displayed as:

where, C is the annual coupon = $60, interest rate, i = 5%, M = $1000

Number of years to maturity is almost 8 years (assuming today is 1st Jan 2018, and bond matures on Dec 31, 2025).

Substituting the values in formula:

P = 387.7928 + 676.8394 = $1,064.63

So, the price you should be willing to pay is $1064.63 (which means bond is undervalued at current price of $1010)

P.S: Let me know in comments if number of years to maturity or coupon periodicity is known

jeff jeffy answered 1 year ago

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