Question
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
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 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 that will mature in 2027. The Future Value of this bond is therefore $100,000. The bond was issued in December 2017 at an annual rate of 5.0% fixed for 10 years, with interest payments made semi-annually. What is the Present Value of this bond using the three scenarios in Part II: Bond Issuance
PART II: BOND ISSUANCE | |||||||
Newly issued 10-year bond | Calculate the Present Value in the three scenarios below | ||||||
Present Value | PV | ||||||
Periods | N | Semi-annual payment: 2017-2027 = 10 years *2 = 20 periods | |||||
Interest | I | Interest paid semi-annually: 5.00%/2 = 2.5% | |||||
Payments | PMT | This bond make regular semi-annual payments of interest. | |||||
Future Value | FV | Future Value in 20 years - Enter as a positive number | |||||
1. The new value of the bond if overall rates in the market increased by 2% | |||||||
Present Value | PV | ||||||
Periods | N | ||||||
Interest | I | Please adjust interest | %+2% = .00%/2 = % | ||||
Payments | PMT | ||||||
Future Value | FV | ||||||
2. The new value of the bond if overall rates in the market decreased by 2% | |||||||
Present Value | PV | ||||||
Periods | N | ||||||
Interest | I | Please adjust interest | .00%-2% = %/2 = % | ||||
Payments | PMT | ||||||
Future Value | FV | CALCULATING PV (see help on the right hand side of the sheet) | |||||
3. The value of the bond if overall rates in the market stayed exactly the same | |||||||
- identical to CURRENT BOND VALUE from Financial Statements |
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