Suppose there is a bond in ABC Company that that pays coupons of 8.5%, and suppose that these coupons are paid annually. Suppose the face value of the ABC bond is $1000 and the maturity is 11 years.

a) If the appropriate discount rate for this bond is 6%, what would you be willing to pay for ABC’s bond?

b) If a comparable company, XYZ, has a 7.0% coupon bond with a maturity of 9 years and a face value of 1000, and that bond is trading in the market for $994.50, what would you be willing to pay for ABC’s bond?

c) Suppose you find that the true fair value for ABC bond is $1200.00, but you see that the bond trading for $1051.00, what would you recommend?

$1197.17185

Step-by-step explanation:

ABC bond :

Par value of bond (FV) = 1000

Period (n) = 11 years

Coupon rate (r) = 8.5% annually

Discount rate (r) = 6% = 0.06

The coupon price = 8.5% of par value

Coupon price (C) = 0.085 * 1000 = 85

Current price of bond can be computed using the relation:

= C * [1 - 1 / (1 + r)^n] / r + (FV / (1 + r)^n)

85 * [1 - 1/(1+0.06)^11]/0.06 + 1000/(1 + 0.06)^11

85 * 7.8868745 + 526.78752

670.38433 + 526.78752 = $1197.17185

a

step-by-step explanation:

the answer is a

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