Question
Assuming this company already has bonds outstanding, calculate the following: 1. The new value of the bond if overall rates in the market increased by
Assuming this company already has bonds outstanding, calculate the following:
1. The new value of the bond if overall rates in the market increased by 2%
2. The new value of the bond if overall rates in the market decreased by 2%
3. The value of the bond if overall rates in the market stayed exactly the same
B. What effect would you expect each of the calculations you performed to have in terms of the companys decision to raise capital in this manner? In other words, for each situation, would you consider bond valuation to be a viable option for increasing capital? Be sure to justify your reasoning.
Calculate the present value in the three scenarios below:
Present Value | PV | ||
Periods | N | Semi-annual payment: 2017-2027 | |
Interest | I | Interest paid semi-annually | |
Payments | PMT | This bond make regular semi-annual payments of interest (entered in $ dollars semiannually). | |
Future Value | FV | Future Value in 10 years = Bonds Original Face Value |
1.
Present Value | PV | ||
Periods | N | Semi-annual payment: 2017-2027 | |
Interest | I | Please adjust interest | |
Payments | PMT | This bond make regular semi-annual payments of interest (entered in $ dollars semiannually). | |
Future Value | FV | Future Value in 10 years = Bonds Original Face Value |
2.
Present Value | PV | ||
Periods | N | Semi-annual payment: 2017-2027 | |
Interest | I | Please adjust interest | |
Payments | PMT | This bond make regular semi-annual payments of interest (entered in $ dollars semiannually) | |
Future Value | FV | Future Value in 10 years = Bonds Original Face Value |
Bonds are a long-term debt for corporations. By buying a bond, the bond-owner lends money to the corporation. The borrower promises to pay specified interest rate (dividend) during the loans lifetime and at the maturity, payback the entire principle. In case of bankruptcy, bondholders have priority over stockholders for any payment distributions. Bonds = Debt...............Bondholders = Lenders Stock=Equity................Stockholders = OwnersCalculation: For purposes of this exercise, assume that UPS issues a new ten-year bond for $100,000 (Face Value) that will mature in 2027 (10-Years). The Future Value of this bond is therefore $100,000. The bond was issued in December 2017 at a market interest rate of 5.0% fixed for 10 years, with interest payments made semi-annually (Note: The payment never changes even if the original rate of 5% increases or decrease). What is the Present Value of this bond using the three scenarios in Part II: Bond Issuance. Note: The PMT of interest remains constant at 5% semiannually in dollars. The Interest Rate of 5% annually is what increases by 2% annually in Q1. and decreases by 2% annually in Q2. |
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