Problem # 1 – What is the cost of new AND existing debt if the current price of the bonds is $1,050? The bonds pay a semiannual coupon of $80 ($40 every six months), mature in 12 years, and have a face value of $1,000.The floatation cost for debt is 5%.
Problem # 2- Assume that you are considering the purchase of a $1,000 par value bond that pays interest of $70 every six months (Total of $140 per year) and has 10 years to go before it matures. If you buy this bond, you expect to hold it for 5 years and then to sell it in the market. You (and other investors) currently require a nominal annual rate of return of 16%, but you expect the market to require a nominal rate of return of only 12% when you sell the bond due to a general decline in interest rates. How much should you be willing to pay for this bond today?
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