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In: Finance

ABC company had $300,000,000 of debt outstanding at Face Value. The bonds have annual 2% coupon...

ABC company had $300,000,000 of debt outstanding at Face Value. The bonds have annual 2% coupon payments and a remaining life of 8 years to maturity. The bonds just got re-rated and the market determined yield to maturity changed from 5% to 3%. By what amount did the market value of the bond change?

a.

$51,168,915 recognized decrease in bond value
b.

$51,168,915 recognized increase in bond value
c.

$37,109,838 recognized decrease in bond value
d.

$37,109,838 recognized increase in bond value

Solutions

Expert Solution

Coupon = 300 millions *2% = 6 millions

Current YTM = 5%

Number of years to maturity = 8

Present market value using financial calculator

[N = 8 ; I/Y = 5% ; PV = ? ; PMT = 6 ; FV = 300]

= $241.831085 millions

Now YTM has decreased to 3% so new market value

[N = 8 ; I/Y = 3% ; PV = ? PMT = 6 ; FV = 300]

= $278.940923 millions

So increase in value = 278.940923 - 241.831085

= $37,109,838

option d is correct answer

jeff jeffy answered 2 years ago
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