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Current market price of the bond

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Neues Geschaft, Inc., has an outstanding perpetual bond with a 10% coupon rate that can be called in one year. The bonds make annual coupon payments.
The call premium is set at $150 over par value. There is a 40% chance that the interest rate in one year will be 12%, and a 60% chance that the interest rate will be 7%. If the current interest rate is 10%, what is the current market price of the bond?

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The price of the bond today would be the present value of the cash flows from the bond.
We estimate the cash flows at the end of 1 year for the bond holders and then use these to calculate the price today.
If the interest rate in one year is 12%, the bonds would not be called as the price would be lower than the call ...

Solution Summary

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

$2.19
See Also This Related BrainMass Solution

Find the bond values and yields in the given cases.

Problem 1
Suppose a corporation's bonds have 8 years remaining to maturity. In addition, suppose the bonds have a $1000 face value, and the coupon interest rate is 7%. The bonds have a yield to maturity of 10%. Complete parts (a) and (b) below.
a) Compute the market price of the bonds if interest is paid annually.
b) Compute the market price of the bonds if interest is paid semiannually.

Problem 2
Suppose a corporation's bonds have a current market price of $1400. The bonds have a 13% annual coupon rate, a $1000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 107% of face value. Complete parts (a) through (c) below.
a) Compute the bonds' current yield.
b) Compute the yield to maturity.
c) Find the yield to call, if the bonds are called in 5 years.

Problem 3
A company has a bond issue outstanding that pays $150 annual interest plus $1000 at maturity. The bond has a maturity of 10 years. Compute the value of the bond when the interest rate is 5%, 9%, and 13%. Describe the pattern and the type of risk that may apply.

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