Four years ago, SONO Ltd. raised $30 million by issuing 15-year $1,000 par value bonds that carry 6.8% coupon rate, payable semiannually. SONO Ltd. is currently announcing to raise another $20 million by issuing 15-year zero coupon bonds that discount semi-annually. The current YTM on these bonds is 9%. Calculate the current bond prices of the 15-year coupon bonds and 15-year zero coupon bonds. Calculate the number of the 15-year zero coupon bonds that SONO Ltd. currently issues to raise the $20 million. What will be the company’s repayment be at the maturity date of the 15-year zero coupon bonds? Are 15-year 6.8% coupon bonds or 15-year zero coupon bonds more sensitive to changes in market interest rates?
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Four years ago, SONO Ltd. raised $30 million by issuing 15-year $1,000 par value bonds that carry 6.8% coupon rate, payable semiannually.
SONO Ltd. is currently announcing to raise another $20 million by issuing 15-year zero coupon bonds that discount semi-annually.
The current YTM on these bonds is 9%.
- Calculate the current
bond prices of the 15-year coupon bonds and 15-year zero coupon bonds. - Calculate the number of the 15-year zero coupon bonds that SONO Ltd. currently issues to raise the $20 million. What will be the company’s repayment be at the maturity date of the 15-year zero coupon bonds?
- Are 15-year 6.8% coupon bonds or 15-year zero coupon bonds more sensitive to changes in market interest rates?
Step by step
Solved in 2 steps with 2 images
