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 being paid semiannually. The required simple rate of return on this debt has now risen to 16 percent. What is the current value of this bond? (Round the answer to the nearest whole number.)

Question

Quizplus · Accepted Answer

To calculate the current value of the bond, we need to calculate the present value of all future cash flows. We can use the following formula to calculate the present value of a bond:

PV = (C / (1 + r/n)^nt) + (F / (1 + r/n)^nt)

Where:
PV = present value
C = coupon payment
r = required rate of return
n = number of coupon payments per year
t = number of years to maturity
F = face value

Plugging in the given values, we get:

PV = (40 / (1 + 0.16/2)^(15*2)) + (1000 / (1 + 0.16/2)^(15*2))
PV = $549.52

Therefore, the current value of the bond is $550, rounding to the nearest whole number. Option D is the correct answer.

Due to a Number of Lawsuits Related to Toxic Wastes