Market value of bonds
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In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today, January 1, 2002, is as follows:
Long-term debt (bonds, at par) $10,000,000
Preferred stock 2,000,000
Common stock ($10 par) 10,000,000
Retained earnings 4,000,000
Total debt and equity $26,000,000
The bonds have a 4 percent coupon rate, payable semiannually, and a par value of $1,000. They mature on January 1, 2012. The yield to maturity is 12 percent, so the bonds now sell below par. What is the current market value of the firm's debt?
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The solution explains how to calculate the market value of bonds of KLM Corporation
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The bonds mature in 10 years. The market value of the bonds is the present value of all the cash flows. The discounting rate is the required return, which is the same as YTM. Since the interest is paid semiannually, there would be 20 interest payments in 10 years and the discounting rate would be 6% ( the rate is ...
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