Question

In: Finance

Zlw Inc. has decided to issue bonds to raise capital fora large-scale project that involves...

Zlw Inc. has decided to issue bonds to raise capital for a large-scale project that involves the construction of 24 new wind turbines in Tehachapi, CA.

DO NOT USE EXCEL FUNCTIONS- ONLY FORMULAS

(a) The bonds will have the following characteristics:

Annual coupons of $50

Face value of $1000

Maturity of 6 years

The required rate of return on the part of Zlw’s bondholders is 5%.

What is the value of the bonds?

(b) Assume instead (in this question only) that the maturity of the bonds is 7 years rather than 6. How does this change your answer in question (a)? Can you explain what is happening?

(c) Assume instead (in this question only) that the required rate of return on the part of the bondholders is 6%. How does this change your answer in question (a)? Can you explain what is happening?

(d) Assume instead (in this question only) that the required rate of return on the part of the bondholders is 4%. How does this change your answer in question (a)? Can you explain what is happening?

Solutions

Expert Solution

Face value of bond = $ 1000

Annual coupouns = $ 50

Answer to Part (a)

maturity period = 6 years

required rate of return =5%

value of bond = ?

value of bonds/current price of the bond = 50*PVIFA(5%,6years) + 1000*PVIF(5%,6year)

= 50*5.075692 + 1000*0.746215

= 253.7846 + 746.215

= 999.9996 or $ 1000

Answer to Part (b)

Maturity period = 7 years

rest all same as per part (a)

Value of bond = 50*PVIFA(5%,7years) + 1000*PVIF(5%,7year)

= 50*5.786373 + 1000*0.710681

= 289.3187 + 710.681

= $ 1000

No effect on answer. due to its coupon rate (50/1000 =5%) = required rate/market rate its value comes equal to its par value at any point of time.

Answer to Part (c)

Required rate of return = 6%

rest all are same as per part (a)

value of bond = 50*PVIFA(6%,6years) + 1000*PVIF(6%,6year)

= 50*4.917324 + 1000*0.704961

= 245.8662 + 704.961

= $ 950.83

it decreases the value of bond. the required rate is 6% which is above its coupon rate (5%) due to which the value of bond decreases.

Answer to Part (d)

Required rate of return = 4%

rest all are same as per part (a)

value of bond = 50*PVIFA(4%,6years) + 1000*PVIF(4%,6year)

= 50*5.242137 + 1000*0.790315

= 262.1068 + 790.315

= $ 1052.421

it increases the value of bond. the required rate is 4% which is below its coupon rate (5%) due to which the value of bond increases.

jeff jeffy answered 2 years ago

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