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Basic bond valuation Complex Systems has an outstanding issue of $1,000-par-value bonds with a 8% coupon interest rate. The issue pays interest annually and has
Basic bond valuation Complex Systems has an outstanding issue of $1,000-par-value bonds with a 8% coupon interest rate. The issue pays interest annually and has 12 years remaining to its maturity date. a. If bonds of similar risk are currently earning a rate of return of 7%, how much should the Complex Systems bond sell for today? b. Describe the two possible reasons why the rate on similar-risk bonds is below the coupon interest rate on the Complex Systems bond. c. If the required return were at 8% instead of 7%, what would the current value of Complex Systems' bond be? Contrast this finding with your findings in part a and discuss. a. If bonds of similar risk are currently earning rate of return of 7%, the Complex Systems bond should sell today for $(Round to the nearest cent.) b. Describe the two possible reasons why the rate on similar-risk bonds is below the coupon interest rate on the Complex Systems bond. (Select the best answer below.) O A. Since Complex Systems' bonds were issued, there may have been a shift in the supply-demand relationship for their product or a change in the risk towards loans. OB. Since Complex Systems' bonds were issued, there may have been a change in the supply-demand relationship for money or a shift i the investors' attitudes towards the firm. OC. Since Complex Systems' bonds were issued, there may have been shift in the supply-demand relationship for money or a change in the risk towards the firm. OD. Since Complex Systems' bonds were issued, there may have been change in the number of bonds available or a change in the coupon interest rate. c. If the required return were at 8% instead of 7%, the current value of Complex Systems' bond would be $ (Round to the nearest cent.) When the required return is equal to the coupon rate, the bond value is V the par value. In contrast in part a above, if the required return is less than the coupon rate, the bond will sell at a (its value will be greater than par). (Select the best answers from the drop-down menus.)
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