1.Bill and Warren are thinking about issuing 11 percent coupon bonds that will mature in 15 years. Market interest rates are 13 percent. What could they sell each of the bonds for?
To determine what Bill and Warren could sell each of the bonds for, you need to calculate the bond's present value. The present value of a bond is the discounted value of its future cash flows, which in this case are the coupon payments and the final maturity payment.
Here's how you can calculate the present value of the bonds:
Step 1: Determine the future cash flows:
- Each bond has a coupon rate of 11%. Since the bonds mature in 15 years, there will be 15 coupon payments of 11% of the bond's face value.
- The final maturity payment is equal to the face value of the bond.
Step 2: Determine the discount rate:
- The market interest rate is given as 13%. This interest rate represents the discount rate to be used in the present value calculation.
Step 3: Calculate the present value of the cash flows:
- To calculate the present value of each coupon payment, you need to discount each payment using the market interest rate for each respective year.
- To calculate the present value of the final maturity payment, you need to discount the future value using the market interest rate and the time remaining until maturity.
Step 4: Add up the present values of the cash flows:
- Sum up the present values of the coupon payments and the final maturity payment to get the total present value.
Finally, divide the total present value by the number of bonds to find out what Bill and Warren could sell each bond for.
Keep in mind that the calculation assumes annual coupon payments and compounding. If there are different coupon frequencies or compounding periods, adjust the calculation accordingly.