A private, for profit clinic has a bond issue outstanding with a coupon rate of 8 percent and five years remaining until maturity. The par value of the bond is $1000, and the bond pays interest annually.
What is the current value of the bond if present market conditions justify a 16% required rate of return?
Now suppose the center’s five-year bond had semiannual coupon payments. What is its current value? (assume an 8% semiannual required rate of return. But the actual rate would be slightly less than 8% because a semiannual coupon bond is slightly less risky than an annual coupon bond).
Now assume that the center’s bond had a semiannual coupon but 30 years remaining to maturity. What is the current value under these conditions? (Assume an 8% semiannual required rate of return. But the actual rate would be slightly greater than 7% because of increased price risk).