Question

In: Finance

The problem refers to the bonds of The Apollo Corporation, all of which have a call...

The problem refers to the bonds of The Apollo Corporation, all of which have a call feature. The call feature allows Apollo to pay off bonds anytime after the first 15 years, but requires that bondholders be compensated with an extra year's interest at the coupon rate if such a payoff is exercised.

Apollo's Alpha bond was issued 10 years ago for 30 years with a face value of $1000. Interest rates were very high at the time, and the bond's coupon rate is 20%. The interest rate is now 13.5%. Assume bond coupons are paid semiannually.

  1. At what price should an Alpha bond sell? Round the answer to the nearest cent.
    $   
  2. At what price would it sell without the call feature? Round the answer to the nearest cent.
    $   

Solutions

Expert Solution

Answer :

(a)-Selling Price of the Bond :

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Maturity Value

Maturity Value = $1,200 [$1,000 Face Value + $200 one-year Coupon payment]

Semi-annual Coupon Amount = $100 [$1,000 x 20% x ½]

Semi-annual Yield to Maturity = 6.75% [13.5% x ½]

Maturity Period = 10 Years [(15 Years – 10 Years) x 2]

Price of the Bond = Present Value of the Coupon Payments + Present Value of the Maturity Value

= $100 [ PVIFA 6.75% , 10 years ] + $1,200 [ PVIF 6.75% , 10 years ]

= [ $100 x 7.1055 ] + [ $1,200 x 0.5204 ]

= $710.55 + $624.48

= $1,335.03

The selling price of the bond would be $1,335.03.

(b)-Price of the Bond without the call feature :

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value = $1,000

Semi-annual Coupon Amount = $100 [$1,000 x 20% x ½]

Semi-annual Yield to Maturity = 6.75% [13.5% x ½]

Maturity Period = 40 Years [(30 Years – 10 Years) x 2]

Price of the Bond = Present Value of the Coupon Payments + Present Value of the Face Value

= $100 [ PVIFA 6.75% , 40 years ] + $1,000 [ PVIF 6.75% , 40 years ]

= [ $100 x 13.7284 ] + [ $1000 x 0.0733 ]

= $1372.84 + $73.3

= $1446.14

Price of the Bond without the call feature is $1446.14.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

The problem refers to the bonds of The Apollo Corporation, all of which have a call...
The problem refers to the bonds of The Apollo Corporation, all of which have a call feature. The call feature allows Apollo to pay off bonds anytime after the first 15 years, but requires that bondholders be compensated with an extra year's interest at the coupon rate if such a payoff is exercised. Apollo's Alpha bond was issued 10 years ago for 30 years with a face value of $1000. Interest rates were very high at the time, and the...
The problem refers to the bonds of The Apollo Corporation, all of which have a call...
The problem refers to the bonds of The Apollo Corporation, all of which have a call feature. The call feature allows Apollo to pay off bonds anytime after the first 15 years, but requires that bondholders be compensated with an extra year's interest at the coupon rate if such a payoff is exercised. Apollo's Alpha bond was issued 10 years ago for 30 years with a face value of $1000. Interest rates were very high at the time, and the...
(     ) 1. Agency problem of a corporation refers to:             A)        The total dividends paid...
(     ) 1. Agency problem of a corporation refers to:             A)        The total dividends paid to shareholders over the lifetime of the firm.             B)        The costs that result from default and bankruptcy of the firm.             C)        Corporate income subject to double taxation.             D)        The conflict of interest between stockholders and management. (     ) 2. The primary goal of financial management is to:             A)        Maximize current sales.             B)        Maximize the current value per share of...
Problem 5-22 Yield to Maturity and Yield to Call Arnot International's bonds have a current market...
Problem 5-22 Yield to Maturity and Yield to Call Arnot International's bonds have a current market price of $1,350. The bonds have an 12% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (call price = 1,090). What is the yield to maturity? Round your answer to two decimal places. % What is the yield to call if they are called in 5...
Apollo Corporation issued $560,000 of 7%, 12-year bonds payable on March 31, 2016. The market interest...
Apollo Corporation issued $560,000 of 7%, 12-year bonds payable on March 31, 2016. The market interest rate at the date of issuance was 10%, and the Apollo Corporation bonds pay interest semiannually. Apollo Corporation's year-end is March 31. Calculate the issue price of the bonds using the PV function in Microsoft® Excel®. Prepare an effective-interest amortization table for the bonds through the first three interest payments. Round amounts to the nearest dollar. Record Apollo Corporation's issuance of the bonds on...
Which of the following bonds will have the smallest percentage increase in value if all market...
Which of the following bonds will have the smallest percentage increase in value if all market interest rates decrease by 1%? A.  20-year, zero coupon bond. B.  10-year, zero coupon bond. C.  20-year, 10% coupon bond. D.  20-year, 5% coupon bond. E.  1-year, 10% coupon bond.
Slater Mines just called its outstanding bonds at a call price of $1,025. The bonds have...
Slater Mines just called its outstanding bonds at a call price of $1,025. The bonds have a conversion price of $33.33 and a par value of $1,000. The stock price is currently $33.10. In response to this call, what should the bondholders do and why? If the conversion price changes to $32.05, what should the bondholders do and why? At what conversion price would the bondholder be indifferent to letting the bond be called and converting the bond to common...
Which compounds have nonpolar covalent bonds, which have polar covalent bonds, and which have ions? LiF,...
Which compounds have nonpolar covalent bonds, which have polar covalent bonds, and which have ions? LiF, CH3F, MgCl2, HCl
3. Calculate the fair present value of the following bonds, all of which have a 10...
3. Calculate the fair present value of the following bonds, all of which have a 10 percent coupon rate (paid semiannually), face value of $1,000, and a required rate of return of 8 percent. a. The bond has 10 years remaining to maturity. _________ b. The bond has 15 years remaining to maturity. _________ c. The bond has 20 years remaining to maturity. _________ d. What do your answers to parts (a) through (c) say about the relation between time...
1. Which of the following bonds would have the highest percentage change in value if all...
1. Which of the following bonds would have the highest percentage change in value if all interest rates in the economy decrease by 1%? Group of answer choices 20-year, zero coupon bond. 20-year, 5% coupon bond. 10-year, zero coupon bond. 1-year, 10% coupon bond. 20-year, 10% coupon bond. 2. Suppose you are signing a loan contract of $65,000 at an interest rate of 8.5%. You must make 5 equal payments at the end of the year for 5 years. How...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT