Bond Yield

Bond Yield Attempt to use weighted average of debt

Present Value of Cash Flows as Rates Change

Formula:

Bond Value = PV of coupons + PV of face

Bond Value = PV annuity + PV of lump

Required Return Ms. Smith wants you to use the weighted average bond yield for your required return. The total market value of debt that ACH is expected to have going into this investment is $120M, which includes the impact of the $40M to be paid off this year that has not been included in the financial statements. The current outstanding debt has an interest rate of 8%, but ACH is refinancing $50M of the debt at a lower interest rate of 6%. All of the $120M in debt is in the form of bonds. Ignore income tax effects when calculating the required return (i.e., do not take the after-tax cost of debt). Use current interest rates as a proxy for bond yield.