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Bond Valuation and Selling

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You own 10 shares of Standard Motors bonds. These bonds pay an annual coupon payment of $100 dollars, have a par value of $1000 and 10 years until maturity. Standard Motors is having financial difficulty and has requested postponement of the interest payments for the next 5 years. Standard Motors expects to make the interest payments for years 6 through 10 when due. It is just the next 5 payments they would like postpone. The postponed payments will accrue interest at a rate of 12% and will be paid in a lump sum at maturity. Because of the financial problems being experience by Standard Motors, investors are now requiring a rate of return of 25% on the bonds. How much can you sell each of your Standard Motors bonds for?

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You own 10 shares of Standard Motors bonds. These bonds pay an annual coupon payment of $100
dollars, have a par value of $1000 and 10 years until maturity. Standard Motors is having financial
difficulty and has requested postponement of the interest payments for the next 5 years. Standard
Motors expects to make the interest payments for years 6 through 10 when due. It is just the next 5
payments they would like ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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