Question

You have been given the opportunity to purchase a $100 Transocean, Inc. corporate bond for $96.24. The bond was issued on 10/1/2001 and matures on 10/1/2031. It has a coupon rate of 7.5% per year and coupons are paid twice a year. If your MARR for bonds of this grade (Moody’s rating = Caa1) is 8.8% per year (nominal) should you purchase the bond today? You must draw a correct cash flow diagram to get full credit for this problem.

Answer 1

Intrinsic value of bond = Half yearly Coupen Amount * PVAF ( haf year rate, number of half years ) + Face value * PVIF ( haf year rate, number of half years )

                                 = [ 100 * 7.5% * 6 / 12 ] * PVAF (8.80/2%, 30*2) + 100 * PVAF (8.80/2%, 30*2)

   = 3.75 * PVAF(4.40%, 60) + 100 * PVIF(4.40%, 60)

   = 3.75 * [ 1/1.044 + 1/1.044² + ..... + 1/1.044³⁰ ] + 100 * 1/1.044³⁰

                                 = 3.75 * 16.4823 + 100 * 0.2748

                                 = 61.81 + 27.48

                                 = $ 89.29

No we should not purchase the bond. It is overvalued.