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24 May, 19:38

The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

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  1. 24 May, 20:33
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    Value of Firm's Debt is $541.20

    Explanation:

    Coupon payment = 1000 x 4% = $40 / 2 = $20

    Number of periods = n = 10 years x 2 = 20

    Face value = $1,000

    YTM = 12% / 2 = 6% = 0.06

    Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula:

    Price of the Bond = C x [ (1 - (1 + r) ^-n) / r ] + [ F / (1 + r) ^n ]

    Price of the Bond = $20 x [ (1 - (1 + 6%) ^-20) / 6% ] + [ $1,000 / (1 + 6%) ^20 ]

    Price of the Bond = $20 x [ (1 - (1.06) ^-20) / 0.06 ] + [ $1,000 / (1.06) ^20 ]

    Price of the Bond = $229.4 + $311.80

    Price of the Bond = $541.20
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