Woodside Petroleum Limited has issued $100 million of debentures with a fixed interest coupon equal to...

Woodside Petroleum Limited has issued $100 million of debentures with a fixed interest coupon equal to current interest rates of 7.70 per cent per annum, coupons paid half-yearly and a maturity of 10 years. (Viney & Phillips, 8th ed., p.349 Q13)

(a) What amount will Woodside raise of the initial issue?

(b) After three years, yields on identical types of securities have risen to 8.75 per cent per annum. The existing debentures have exactly seven years to maturity. What is the value or price of the existing debentures in the secondary market?

(c) Discuss why the value of the debentures has changed; that is, explain the bond price/yield relationship using the above example.

Solutions

Expert Solution

1-	value of bond	Using present value function in excel	pv(rate,nper,pmt,fv,value)	rate = 7.7/2 = 3.85% nper =102 =20 pmt = 1003.85% = 3.85 fv =100 type =0	PV(3.85%,20,3.85,100,0)	($100.00)
	Amount of Initial issue Woodside raise	because coupon rate and market rate of interest rate is same so Issue price would be equal to par value	100	Million
2-	value of bond	Using present value function in excel	pv(rate,nper,pmt,fv,value)	rate = 8.75/2 = 4.375% nper =72 =14 pmt = 1003.85% = 3.85 fv =100 type =0	PV(4.375%,14,3.85,100,0)	($94.59)
3-	Pric e of bond and YTM are inversely related so if market rate changes and it is more than the coupon rate, bonds would be sold at a price less than the face value and if market interest rate is less than the coupon rate, bonds would be sold a value higher than the face value. Value of bond changed due to change in market interest rate or YTM which has increased from 7.7% per annum to 8.75%

jeff jeffy answered 1 year ago

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