Question

Cox Media Corporation pays a coupon rate of 11 percent on debentures that are due in 25 years. The current yield to maturity on bonds of similar risk is 10 percent. The bonds are currently callable at $1,020. 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.)
  

b. Do you think the bonds will sell for the price you arrived at in part a?
  

	Yes
	No

Answer 1

face value = $1000, since we are doing semiannual analysis number of periods would be double the number of years, coupon rate, coupon payment, yield to maturity would be half of the coupon rate, coupon payment, yield to maturity of an annual bond analysis respectively.

time to maturity = 25 years, number of periods = 50

coupon rate = 11% /2 = 5.5%

coupon payment = $110/2 = $55

yield to maturity = 10%/2 = 5%

price of a bond is the present value of all future cash flows( we are ignoring the call option part here and treating it as a straight bond).

price of bond = $1091.2

b) price of a callable bond = price of plain bond - price of the call option

the call option gives issuer an advantage to redeem back bond anytime he wishes but simultaneously it generates additional risk for the investor . so the price of the callable bond will always be lesser than the price of a straight bond with similar features.