Question
LifeLocks bonds were in demand. Small Boutique LLC has acquired 500 of LifeLock bonds with 8 years remaining to maturity, an annual coupon rate of
LifeLocks bonds were in demand. Small Boutique LLC has acquired 500 of LifeLock bonds with 8 years remaining to maturity, an annual coupon rate of 8%, and a face value of $1,000. Unfortunately, LifeLocks is now on the brink of bankruptcy. All the creditors including Small Boutique LLC have agreed to a postponement of the next 4 interest payments (starting with the one to be paid at the end of the current year.) The remaining interest payments, for Years 5 through 8, will be made as scheduled. The postponed payments will accrue interest at an annual rate of 6 percent, and they will then be paid as a lump sum at maturity 8 years hence. The required rate of return on these bonds, considering their substantial risk, is now 28 percent. What is the present value of each bond?
a. | $266.88 | |
b. | $249.98 | |
c. | $384.84 | |
d. | $538.21 | |
e. | $426.73 |
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