Question

Cox Media Corporation pays a coupon rate of 10 percent on debentures that are due in 20 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,150. 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

(1)-Current market value of the Bond

The Current market value of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the bond = $1,000

Semi-annual Coupon Amount = $55 [$1,000 x 10% x ½]

Semi-annual Yield to Maturity = 4% [8% x ½]

Maturity Period = 40 Years [20 Years x 2]

The Current market value of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $50[PVIFA 4%, 40 Years] + $1,000[PVIF 4%, 40 Years]

= [$50 x 19.79277] + [$1,000 x 0.20829]

= $989.64 + $208.29

= $1,197.93

“The Current market value of the Bond will be $1,197.93”

(b)-NO. The Bond will not sell for the price arrived at in part a, since the Call Price of the Bond ($1,151) is less than the Current market value of the Bond computed above ($1,197.93)

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

--The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.