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Present value of the lump sum payment

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Reference no: EM133146119

Illusion Enterprises issued 8%, 10-year bonds with a face value of $1,000.   Interest is paid annually at the end of each year.

Over the course of six years, Illusion has lost market share as a result of quality control difficulties and has incurred substantial costs due to lawsuits.  The firm has a current ratio of just less than 1.0 and a debt ratio of 90%.

Although the company believes it can recover, in order to compensate for the increased level of risk, investors require 15% interest on similarly risky bonds. 

The bond has four years remaining until maturity.

You are a risk-tolerant investor and would like to calculate the expected market price for this bond.

Please calculate the following: 

  1. The present value of the lump sum payment.
  2. The present value of the interest income.
  3. The expected present value of the bond.

Reference no: EM133146119

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