On July 1, 2012, Max Corp. sold a $900 million bond issue to finance the purchase of a new distribution facility. These bonds were issued in $1,000 denominations with a maturity date of July 1, 2042. The bonds have a coupon rate of 10.00% with interest paid semiannually.
Required:
Determine the value today, July 1, 2022 of one of these bonds to an investor who requires a 8 percent return on these bonds. Why is the value today different from the par value?
Assume that the bonds are selling for $1,110.00. Determine the current yield and the yield-to-maturity. Explain what these terms mean.
Explain what layers or textures of risk play a role in the determination of the required rate of return on Max’s bonds.