1. Complex Systems has an outstanding issue of $1000 par value bonds with a 11% coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date.
a) If the bonds of similar risk are currently earning a rate of return of 9%, how much should Complex Systems bond sell for today?
b) Describe the two possible reasons why the rate on similar-risk bonds is below the coupon interest rate on the Complex System bond.
c) If the required return were at 11% instead of 9%, what would be the current value of Complex Systems' bond? Contrast this find with your findings in part a and discuss.
2. The Salem Company bond currently sells for $1,262.40, has a coupon interest rate of 18% and a $1000 par value, pays interest annually and has 20 years to maturity.
a) Calculate the yield to maturity (YTM) on this bond.
b) Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of the bond.
3. Find the value of a bond maturing in 6 years, with a $1000 par value and a coupon interest rate of 13% (6.5% paid semiannually) if the required return on similar-risk bonds is 13% annual interest (6.5% paid semiannually).