Problem: Universal Systems has an outstanding issue of $1,000 par value bonds with a 12% coupon interest rate. The issue pays interest annually and has 16 years remaining to maturity date.
1. If bonds of similiar risk are currently earing a 10% rate of return how much should Universal Systems bond sell for today?
2. Describe the two possible reasons why similar risk bonds are currently earing a retun below the coupon interest rate on the Universal Systems bond.
3. If the required return were at 12% instead of 10% what would the current value of Universal Systems bond be? Contrast this finding with your findings in part a and discuss.