On November 1, 2013, Matthew Corp. sold a $600 million bond issue to finance the purchase of a new distribution facility. These bonds were issued in $1,000 denominations with a maturity date of November 1, 2033. The bonds have a coupon rate of 8.00% with interest paid semiannually. Required: Determine the value today, November 1, 2023 of one of these bonds to an investor who requires a 10 percent return on these bonds. Why is the value today different from the par value? Assume that the bonds are selling for $870.00. Determine the current yield and the yield-to-maturity. Explain what these terms mean. Explain what layers or textures of risk play a role in the determination of the required rate of return on Matthew’s bonds.
On November 1, 2013, Matthew Corp. sold a $600 million bond issue to finance the purchase of a new distribution facility. These bonds were issued in $1,000 denominations with a maturity date of November 1, 2033. The bonds have a coupon rate of 8.00% with interest paid semiannually. Required: Determine the value today, November 1, 2023 of one of these bonds to an investor who requires a 10 percent return on these bonds. Why is the value today different from the par value? Assume that the bonds are selling for $870.00. Determine the current yield and the yield-to-maturity. Explain what these terms mean. Explain what layers or textures of risk play a role in the determination of the required rate of return on Matthew’s bonds.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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On November 1, 2013, Matthew Corp. sold a $600 million bond issue to finance the purchase of a new distribution facility. These bonds were issued in $1,000 denominations with a maturity date of November 1, 2033. The bonds have a coupon rate of 8.00% with interest paid semiannually.
Required:
- Determine the value today, November 1, 2023 of one of these bonds to an investor who requires a 10 percent return on these bonds. Why is the value today different from the par value?
- Assume that the bonds are selling for $870.00. Determine the current yield and the yield-to-maturity. Explain what these terms mean.
- Explain what layers or textures of risk play a role in the determination of the required
rate of return on Matthew’s bonds. - For each of the following events, explain what the impact would be on the yield-to-maturity:
- The bond is downgraded by a rating agency.
- The economy seems to be shifting from a recession to a boom economy.
- The bond is subordinated to other bonds.
- Congressional hearings provide pressure on Matthew to significantly reduce the price on several of their products.
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Follow-up Question
For each of the following events, explain what the impact would be on the yield-to-maturity:
-
- The bond is downgraded by a rating agency.
- The economy seems to be shifting from a recession to a boom economy.
- The bond is subordinated to other bonds.
Congressional hearings provide pressure on Matthew to significantly reduce the price on several of their products
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