What is the value of the bond

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Question -

(a) You are considering the purchase of a 12 year fixed coupon bond with a coupon rate of 11%. If the cost of debt is 12% what is the value of the bond? If it was priced at $945 would you consider buying it?

(b) If you expected a rescheduling of years 1 & 2, which are to be added to years 3 & 4 payments respectively, what is the value of the bond if the cost of debt is 12%? Would you consider purchasing it for $890? Explain.

(c) You are offered a five year zero coupon bond for $560. Your required return is 12%. Would you consider buying it?

(d) You are asked to explain variable coupon bonds, especially as the questioner has been told that while valuations are more volatile than fixed coupon bonds, the coupon rates are less variable. Give a short description of variable coupon bonds, focusing on the above query about valuations and coupon rates.

(e) What is a convertible bond? What is the main factor that will trigger a conversion? Give one reason why they are so prevalent in the financing of high-growth, start-up firms?

Reference no: EM133040393

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