Practice Problems # $1$

$(1)$ The Anderson Company is planning to finance a new project by selling bonds. The face value of each bond will

be $$1,000$ and interest payments will be paid annually. The firm's financial manager estimates that they can issue $15-$

year bonds, $8\%$ coupon rate and $$850$ selling price. The financial manager is expecting you to answer the following

questions:

a$.$ What coupon rate must be offered so that the bonds' selling price will be $$1,000$ rather than $$850?($Answer:

$9\mathrm{.}89\%$

b$.$ The manager estimates that the firm will not be able to pay a coupon rate higher than $9\%$ due to expected cash

flow problems in the future and he is interesting in selling the issue for $$786$ per bond. What adjustment in the

issue description is needed in this case if you estimate that the required rate of return will be $12\%?($Show

calculations support your answer$).($Answer: $17$ yrs$.)$

c$.$ Suppose that the firm decides to sell the issue today for $$850$ a bond carrying $8\%$ coupon rate and $15$ years to

maturity. If the market value of the bond $10$ years before maturity is expected to be exactly equal to its value

today, i$.$e$.,$ $$850,$ what does this imply about the change in the required rate of return? Explain your answer.

$($Answer $10\mathrm{.}44\%)$