As part of a reorganization plan, a bankruptcy court has permitted a new indenture on an outstanding bond issue to be put into effect for Cardinal Corporation, which recently filed for bankruptcy. It is known that the issue has $1,000 par value per bond, 15 years to maturity, and a coupon rate of 5 percent paid semi-annually. The reorganization plan allows the following arrangement: For the first five years, there will be no coupon paid (that is, coupon = $0). After five years, regular coupon payments will resume. At maturity, the par value plus the sum of all coupon payments that were not paid during the first seven years must be paid. However, no additional interest will be paid on the deferred coupon payments. If the required rate of return is 4 percent (APR), calculate the current price the Cardianl bonds would sell for in the market.
As part of a reorganization plan, a bankruptcy court has permitted a new indenture on an outstanding
bond issue to be put into effect for Cardinal Corporation, which recently filed for bankruptcy. It is
known that the issue has $1,000 par value per bond, 15 years to maturity, and a coupon rate of 5
percent paid semi-annually. The reorganization plan allows the following arrangement: For the first
five years, there will be no coupon paid (that is, coupon = $0). After five years, regular coupon
payments will resume. At maturity, the par value plus the sum of all coupon payments that were not
paid during the first seven years must be paid. However, no additional interest will be paid on the
deferred coupon payments. If the required
the Cardianl bonds would sell for in the market.
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