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Purchase of Visa Bonds: Arriving at an Acceptable Price

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Suppose Visa is selling a bond that will pay you $1000 in one year from today. Keep in mind that if your company has financial difficulties in one year you might not get your full $1000 back. Given that a dollar one year from now is always worth less than a dollar today, you most certainly would not pay a full $1000 for this bond. Given the concepts of the time value of money, answer the following questions:

1. How much would you pay for this bond today? Take into consideration your own personal risk preferences, interest rates, inflation, and the probability your company will not be able to pay you back in one year.

2. Based on your answer to the previous question, what would be your discount rate for this bond? Use the present value formulas and show your work.

3. Pick two other companies in the same industry as Visa company. One should be one that you would pay less for a $1000 bond than you would from Visa and another one that you would pay more for a $1000 bond from Visa.

4. Explain why you would pay more or less for their bonds.

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This solution discusses the purchase of Visa bonds and how to arrive at an acceptable price.

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