) What is the price of the bond if it were not callable? b) What is the price of the callable bond? c) Assume at the end of year 5, CTI calls the bonds and replaces them by a 15-year bond selling at par. The flotation cost is 1% of the par value. CTI has to issue the new bonds one month before calling. During the month, the proceeds will earn 4% per year. The tax rate is 0.3. What is the NPV of refunding?
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:
please solve a,b,c.
CTI Inc. issues 500 callable bonds with par value of $1,000. This callable bond pays 20% annual coupon and matures in 20 years. Its yield is 16% and it is callable at the end of year 5 at par value plus one additional coupon payment.
|
Yield at end of Year 5 |
Probability |
|
30% |
40% |
|
20% |
30% |
|
10% |
30% |
a) What is the price of the bond if it were not callable?
b) What is the price of the callable bond?
c) Assume at the end of year 5, CTI calls the bonds and replaces them by a 15-year bond selling at par. The flotation cost is 1% of the par value. CTI has to issue the new bonds one month before calling. During the month, the proceeds will earn 4% per year. The tax rate is 0.3. What is the
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