Explore BrainMass

# Basic Bond Valuation

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

COmplex Systems has an outstanding issue of \$1000 par-value bonds with a 12% coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date.

a) if bonds of similar-risk are currently earning a 10% rate of return, how much should COmplex Systems bond sell for today?
b) describe two possible reasons why the rate of similar risk bonds is below the coupon interest rate on similar-risk bonds is below the coupon interest rate on the Complex System bond.
c) if the required return were 12% instead of 10%, what would the current value of Complex Systems' bond be? Contrast the findings in part a) and discuss.

#### Solution Preview

a) if bonds of similar-risk are currently earning a 10% rate of return, how much should COmplex Systems bond sell for today?

The bond should sell for the present value of interest and principal discounted at 10%. Interest is an annuity and so the present value can be calculated using the PVIFA table. Principal is a single sum and the present value can be calculated using the PVIF table.
The annual interest is \$120 (1,000X12%), ...

#### Solution Summary

The solution explains how to calculate the current price of bond.

\$2.19