11. Weir Inc. has a bond in its capital structure that has 20 years to maturity left. The bond has a 9.25% coupon paid annually, sells at a price of $1,000 and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation?

4.35%
4.58%
4.83%
5.08%
5.55%

12. A 15-year bond with a face value of $1,000 currently sells for $800. One year later, if the discount rate is still the same, which of the following statements is CORRECT?

The bondâs price will still be exactly $800.
The bondâs price will still be somewhat greater (perhaps by around $10 more).
The bondâs price will still be somewhat less (perhaps by around $10 less).
The bondâs price will still be significantly greater (perhaps by around $100).
The bondâs price will still be significantly less (perhaps by around $100).

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Deanna HettingerLv2

15 May 2019

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Bond valuation

The process of bond valuation is based on the fundamental concept that the current price of a security can be determined by calculating the present value of the cash flows that the security will generate in the future.

There is a consistent and predictable relationship between a bondâs coupon rate, its par value, a bondholderâs required return, and the bondâs resulting intrinsic value. Trading at a discount, trading at a premium, and trading at par refer to particular relationships between a bondâs intrinsic value and its par value. These result from the relationship between a bondâs coupon rate and a bondholderâs required rate of return.

Remember, a bondâs coupon rate partially determines the interest-based return that a bond (might/will)...........pay, and a bondholderâs required return reflects the return that a bondholder(would like/is obligated).............to receive from a given investment.

The mathematics of bond valuation imply a predictable relationship between the bondâs coupon rate, the bondholderâs required return, the bondâs par value, and its intrinsic value. These relationships can be summarized as follows:

â¢	When the bondâs coupon rate is equal to the bondholderâs required return, the bondâs intrinsic value will equal its par value, and the bond will trade at par.
â¢	When the bondâs coupon rate is greater to the bondholderâs required return, the bondâs intrinsic value will (be less than/exceed/equal)................ its par value, and the bond will trade at a premium.
â¢	When the bondâs coupon rate is less than the bondholderâs required return, the bondâs intrinsic value will be less than its par value, and the bond will trade (at a premium/at par/at a discount).............................

For example, assume Liam wants to earn a return of 5.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 8.75% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bondâs intrinsic value(Link to the formula : http://q4pws.aplia.com/q4pws/rest/1.0/image/image9594/img.png?data=q4%3AREMOTE_URL%3Ahttp%3A%2F%2Faplia-prod-webjboss-372923237.us-east-1.elb.amazonaws.com%2Fproblemsetassets%2Fq4_export%2Ffinance%2Fq4problems%2F3061500.08.xml%2CV5%2C291%2C1%2CSTUDENT%2CSTUDENT%2C0%2Cq4pws-aplia-7.6.4-G2f8d8babd91356776c6b2ec65d5e2a2153b4d346-B36-2015.12.16-03%3A57-PM-PST&oauth_signature=jG%2Fu63kSgI9xRhXign5JItWfpAQ%3D&oauth_version=1.0&oauth_nonce=3573483745&oauth_signature_method=HMAC-SHA1&oauth_consumer_key=q4-callback&oauth_timestamp=1454953012

Complete the following table by identifying the appropriate corresponding variables used in the equation.

unknown --------------------- variable name ---------------------variable value

A --------------------- (Bondholders required return/Bonds annual coupon payment/Bonds semiannual coupon payment)---------------------($21.88/$65.63/$87.50/$43.75)

B--------------------- (Bonds par value/bonds annual coupon payment/semiannual coupon payment) ---------------------$1000

C--------------------- semiannual required return -------------------- ($5.75/$3.81/$4.38/$2.5)

Based on this equation and the data, it is (reasonable/unreasonable)...................to expect that Liamâs potential bond investment is currently exhibiting an intrinsic value greater than $1,000.

Now, consider the situation in which Liam wants to earn a return of 5.75%, but the bond being considered for purchase offers a coupon rate of 8.75%. Again, assume that the bond pays semiannual interest payments and has three years to maturity. If you round the bond's intrinsic value to the nearest whole dollar, then its intrinsic value of ($757/$866/$1407/$1082).................is (equal to/greater than/less than).............................its par value, so that the bond is trading at (par/a discount/a premium)..............................

Given your computation and conclusions, which of the following statements is true?

(a)When the coupon rate is greater than Liamâs required return, the bond should trade at a discount.

(b)A bond should trade at a par value when the coupon rate is greater than Liam's required return

(c) When the coupon rate is greater than Liamâs required return, the bond's intrinsic value will be less than it's par value

(d) When the coupon rate is greater than Liamâs required return, the bond should trade at a premium

A $1,700 face value corporate bond with a 5.6 percent coupon (paid semiannually) has 12 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.9 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 9.2 percent. What will be the change in the bondâs price in dollars and percentage terms? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 3 decimal places. (e.g., 32.161))