Due to a number of lawsuits related to toxic wastes, a major chemical manufacturerin Launcestonhas recently experienced a market reevaluation

Finance Aug 19, 2020

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturerin Launcestonhas recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years tomaturity and a coupon rate of 6per cent, with interest being paid semiannually. The required simple rate on this debt has now risen to 15per cent. What is the current value of this bond?

Expert Solution

We can calculate the current value of the bond by using the following formula in excel:-

=-pv(rate,nper,pmt,fv)

Here,

PV = Current value of bond

Rate = 15%/2 = 7.5% (semiannual)

Nper = 15*2 = 30 periods (semiannual)

Pmt = Coupon payment = $1,000*6%/2 = $30

FV = $1,000

Substituting the values in formula:

= -pv(7.5%,30,30,1000)

= $468.53

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