Long Term Debt consists of Junk Bonds issued at a face value of $7 million. These pay
Question:
Long Term Debt consists of "Junk" Bonds issued at a face value of $7 million. These pay interest semiannually at a rate of 16% p.a. (compounding semi-annually). They have 3 years to maturity. Long Term Debt also includes a secured liability to Huge Company Ltd which currently sits in the books at $3 million. Interest is payable annually on this at a fixed rate of 10% p.a. (which is also the current market rate for this liability). The market yield on the junk bonds is 18%p.a. (compounding semi-annually)
just look at the junk bonds: When calculating the market value of junk bonds, why does the answer use 0.09( 0.18/2) in the formula, rather than r(junk)=18.81%/2? Since the question says '18%p.a. (compounding semi-annually)'. Is this a mistake of the answer?
Financial Institutions, Markets and Money
ISBN: 978-1119330363
12th edition
Authors: David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias