Question

Develop and present a valuation model for corporate debt with a face value of $100 million dollars. The model should use hypothetical assumptions for the coupon rate and other characteristics as well as a hypothetical market interest rate. You must also select a maturity for the bonds and the frequency of the coupon payments. The market rate should be justifiable/reasonable given current market conditions. Explain why the model will be important for the issuance process that is being considered.

Answer 1

Let's assume the following hypothetical values
face value	100 millions
maturity	10 Years
coupon rate - annual payment	8%
current market rate	7.50%
value of bond using discounting technique for Bond valuation	coupon payment*PVAF at 7.5% for 10 years + principal payment*pvf at 7.5% at 10th year	(80*6.8640)+(100*.4851)	597.63
PVAF at 7.5% for 10 Years	1-(1+r)^-n/r	1-(1.075)^-10 / .075	.5148/.075 = 6.8640
PVF at 7.5% at 10th year	1/(1+r)^n	1/1.075^10	0.485193928
This model will help in the issuance process by determining the issue price of bond at current rate of interest which will yield to investor equal to market rate of return. This model will help the issuing company to decide whether the bonds would be issued at a price of par, discount or premium value so that a yield equal to market return to the be offered to bondholders.