Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest paid semiannually. The required nominal rate on this debt has now risen to 16 percent. What is the current value of this bond?

Question

Quizplus · Accepted Answer

The bond's current value is calculated using the present value of its future cash flows, which include semiannual interest payments and the principal at maturity. With the required rate of 16% (or 8% semiannually), the bond's value is significantly lower than its face value, making $550 the correct choice.

Due to a Number of Lawsuits Related to Toxic Wastes