Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If Hurricane intends to sell the bonds in two years and expects investors' required rate of return on similar investments to be 14 percent at that time, what is the expected market value of the bonds in two years?

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Quizplus · Accepted Answer

The expected market value of the bonds in two years is $10.64 million. This is because the bonds will have a remaining maturity of two years, and the required rate of return on similar investments is expected to be 14 percent at that time. Using the bond pricing formula, we can calculate the expected market value of the bonds as follows:Bond Price = (C / r) * [1 - (1 + r)^-n] + (FV / (1 + r)^n)where:C = annual coupon payment = $11 million * 12% = $1.32 millionr = required rate of return = 14%n = number of years to maturity = 2FV = face value of the bonds = $11 millionPlugging these values into the formula, we get:Bond Price = ($1.32 million / 0.14) * [1 - (1 + 0.14)^-2] + ($11 million / (1 + 0.14)^2)= $9.43 million + $1.21 million= $10.64 million