Basic bond valuation Complex Systems has an outstanding issue of

$1,000-par-value

bonds with a

9%

coupon interest rate. The issue pays interest annually and has

11

years remaining to its maturity date.a.If bonds of similar risk are currently earning a rate of return of

8%,

how much should the Complex Systems bond sell for today?

b.Describe the two possible reasons why the rate on similar-risk bonds is below the coupon interest rate on the Complex Systems bond.

c.If the required return is

9%

instead, what would the current value of Complex Systems' bond be? Contrast this finding with your findings in part a and discuss.

Question content area bottom

Part 1

a.If bonds of similar risk are currently earning a rate of return of

8%,

the Complex Systems bond should sell today for

$enter your response here.

(Round to the nearest cent.)

Part 2

b.Describe the two possible reasons why the rate on similar-risk bonds is below the coupon interest rate on the Complex Systems bond.(Select the best answer below.)

A.

Since Complex Systems' bonds were issued, there may have been a change in the number of bonds available or a change in the coupon interest rate.

B.

Since Complex Systems' bonds were issued, there may have been a change in the supply-demand relationship for money or a shift in the investors' attitudes towards the firm.

C.

Since Complex Systems' bonds were issued, there may have been a shift in the supply-demand relationship for their product or a change in the risk towards loans.

D.

Since Complex Systems' bonds were issued, there may have been a shift in the supply-demand relationship for money or a change in the risk towards the firm.

Part 3

c.If the required return were at

9%

instead of

8%,

the current value of Complex Systems' bond would be

$enter your response here.

(Round to the nearest cent.)

Part 4

When the required return is equal to the coupon rate, the bond value is

equal to

greater than

less than

the par value. In contrast in part a above, if the required return is less than the coupon rate, the bond will sell at a

discount

premium

(its value will be greater than par). (Select the best answers from the drop-down menus.)