Question

Cox Media Corporation pays a 10 percent coupon rate on debentures that are due in 20 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,150. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Answer 1

Answer:

The correct answer will be "1197.93".

Step-by-step explanation:

According to the question:

Semi annual coupon:

= $10 \ percent\times \frac{1000}{2}$

= $50$

Number of periods:

= $20\times 2$

= $40$

Semi annual YTM:

= $\frac{8}{2} \ percent$

= $4 \ percent$

Now,

The market value of bond will be:

= PV of Coupons + PV of Par Value

On putting the values, we get

= $50\times (\frac{(1-(1+4 \ percent)^{-40})}{4 \ percent} )+\frac{1000}{(1+4 \ percent)^{40}}$

= $1197.93$

Note: percent = %