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An oil company is issuing a bond with a face value, Z, of $10 billion and a return rate of 8% over a 10-year time frame
An oil company is issuing a bond with a face value, Z, of $10 billion and a return rate of 8% over a 10-year time frame. The dividends for this bond are being paid on a quarterly basis. A global investment bank is interested in purchasing the bond the oil company but it wishes to earn a 12% return because of rising inflation. You are being hired by the oil company to advise on the following What would be the bond value Vn that would meet the bank return interests? Additional Information P/A = 23. 1148 P/F = 0.3066 $5.96 Billion $3.22 Billion $10.30 Billion O $6.34 Billion
Expert Solution
Face value = 10,000,000,000
Return per quarter = 8% / 4 = 2%
Dividend per quarter = 10,000,000,000 = 200,000,000
Interest rate per quarter = 12% / 4 = 3%
Number of quarters (n) = 4 * 10 years = 40
Thus,
The Present Worth of the bond = 200,000,000(P/A, 3%, 40) + 10,000,000,000(P/F, 3%, 40)
= 200,000,000(23.1148) + 10,000,000,000(0.3066)
= 4,622,960,000? + 3,066,000,000
= $7,688,960,000
Thus, the bond value would be $7,688,960,000 that would meet the bank return interests.
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