Question
II. Bond Issuance - Solve for all 3 parts: A. Assuming this company already has bonds outstanding, calculate the following: 1. The new value of
II. Bond Issuance - Solve for all 3 parts:
A. 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 5%
2. The new value of the bond if overall rates in the market decreased by 5%
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.
| Curent Bonds from Financial Statements | ||||||||
| Present Value | PV | ($2,963) | ||||||
| Periods | N | 40 | Semi-annual payment: 2036-2016 = 20 years *2 = 40 periods | |||||
| Interest | I | 2.9375 | Interest paid semi-annually: 5.875%/2 = 2.9375% | |||||
| Payments | PMT | 0 | This bond does not make regular PMT except for interest | |||||
| Future Value | FV | CALCULATING FV (please see help on the right hand side) | ||||||
| 1. The new value of the bond if overall rates in the market increased by 5% | ||||||||
| Present Value | PV | ($2,963) | ||||||
| Periods | N | 40 | ||||||
| Interest | I | Please adjust interest | 5.875%+5% = 10.875%/2 = 5.4375% | |||||
| Payments | PMT | 0 | ||||||
| Future Value | FV | CALCULATING FV (please see help on the right hand side) | ||||||
| 2. The new value of the bond if overall rates in the market decreased by 5% | ||||||||
| Present Value | PV | ($2,963) | ||||||
| Periods | N | 40 | ||||||
| Interest | I | Please adjust interest | 5.875%-5% = 0.875%/2 = 0.4375% | |||||
| Payments | PMT | 0 | ||||||
| Future Value | FV | CALCULATING FV (please see help on the right hand side) | ||||||
| 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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Financial Accounting
Authors: Libby, Short
6th Edition
978-0073526881
