Junk Corp'S High-Yield Bond Has the Following Features

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The Answer is This problem raises the question of how long will the bond be outstanding.a.  If interest rates remain at 12 percent, the company will extend the life of the bond, so the term of the bond is 10 years. The value of the bond is
$110(5.650)+ $1,000(0.322)= $943.50.
(N = 10; I = 12; PMT = 110; FV = 1000;
PV = ? = -943.50.)

b.  If interest rates remain at 9 percent, the firm will refinance and retire the bond after five years. The value of the bond is
      $110(3.890)+ $1,000(.650)= $1,077.90.
      (N = 5; I = 9; PMT = 110; FV = 1000;
      PV = ? = -1077.79.)

c.  Since there is no forecast of interest rates after five years, the term of the bond could be five or ten years.    Value (5 years to maturity):
      $110(3.890)+ $1,000(.650)= $1,077.90    Value (10 years to maturity):
      $110(6.418)+ $1,000(.422)= $1,127.98The price could range from $1,072 to $1,127.98 if yields are 9 percent (interest payments made annually)but the term of the bond is uncertain.

Junk Corp'S High-Yield Bond Has the Following Features

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Junk Corp'S High-Yield Bond Has the Following Features

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Correct Answer:
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