On May 1, 2006 ABC Corporation sold a $500 million bond issue to finance the purchase of a new distribution facility. These bonds were issued in $1,000 denominations with a maturity date of May 1, 2026. The bonds have a coupon rate of 10.00% with interest paid semiannually.
Required:
a) Determine the value today, May 1, 2018 of one of these bonds to an investor who requires an 8 percent return on these bonds. Why is the value today different from the par value?
b) Assume that the bonds are selling for $1,352. Determine the current yield and the yield-to-maturity. Explain what these terms mean.
c) Explain what layers or textures of risk play a role in the determination of the required rate of return on Baxter’s bonds.