Question
2.1 You are interested in valuing bonds issued by Tropez, Inc. The bonds in question will mature in eight years and have a six percent
2.1 You are interested in valuing bonds issued by Tropez, Inc. The bonds in question will mature in eight years and have a six percent coupon rate. Coupons are paid semi-annually. In determining the bond price, you assume the yield to maturity is 5%, which is the yield for another firm's currently trading bonds that you perceive to be of equal risk.
a. Based on these estimates, what should be the current price of a Tropez, Inc. bond?
b. If Tropez bonds are currently trading at $1,050 apiece, would you buy the bonds?
2.2 While valuing the Tropez, Inc. bonds, the Federal Reserve decides to increase interest rates, which results in an instantaneous increase of 0.5% in your yield to maturity estimate.
a. Incorporating this change into your original analysis, what should be the current price of a Tropez, Inc. bond?
b. Distracted by the political environment, the market fails to immediately incorporate this new information, and Tropez's bonds continue to trade at $1,050 apiece. Would you buy the bonds?
2.3 After valuing the Tropez bonds, you realize you have overlooked some very important, publicly-available information regarding the bond issue. Tropez, Inc. has suffered financial reversals recently and is unable to meet its next several coupon payments. By arrangement with its creditors, Tropez will skip the first six coupons. The skipped coupons will be paid at maturity without interest. Not surprisingly, investors view these bonds as risky and require a 12% return. Upon incorporating this information, what price would we expect to see on a Tropez, Inc. bond?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started