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Dooley, Inc. has $100 million (par value) of bonds outstanding, which pay an annual coupon interest rate of 10.5 percent. The par value of each bond is $1,000, and they are scheduled to mature in 20 years. Due to Dooley's increased risk, investors now require a 14 percent rate of return on bonds of similar quality with 20 years remaining until maturity. The bonds are callable at 110 percent of par at the end of 10 years.

Evaluate the financial implications for Dooley, Inc., considering the increased required rate of return and the callable feature of the bonds.

Answer :

To calculate the current price of the bonds, we need to find the present value of the bond's future cash flows. Here's how you can calculate it:

Step 1: Calculate the annual coupon payment:

Coupon Payment = Coupon Rate * Par Value

Coupon Payment = 10.5% * $1,000

Coupon Payment = $105

Step 2: Calculate the number of coupon payments remaining until maturity:

Number of Coupon Payments = Remaining Years until Maturity * Number of Coupon Payments per Year

Number of Coupon Payments = 20 * 1

Number of Coupon Payments = 20

Step 3: Calculate the present value of the coupon payments using the required rate of return:

Present Value of Coupon Payments = Coupon Payment * [1 - (1 + Required Rate of Return)^(-Number of Coupon Payments)] / Required Rate of Return

Present Value of Coupon Payments = $105 * [1 - (1 + 14%)^(-20)] / 14%

Step 4: Calculate the present value of the face value (par value) of the bond:

Present Value of Face Value = Face Value / (1 + Required Rate of Return)^(Remaining Years until Maturity)

Present Value of Face Value = $1,000 / (1 + 14%)^20

Step 5: Calculate the present value of the callable price (110% of par value) at the end of 10 years:

Present Value of Callable Price = Callable Price / (1 + Required Rate of Return)^(Years until Call Date)

Present Value of Callable Price = 1.1 * $1,000 / (1 + 14%)^10

Step 6: Calculate the current price of the bonds by summing up the present values of the coupon payments, face value, and callable price:

Current Price of Bonds = Present Value of Coupon Payments + Present Value of Face Value + Present Value of Callable Price

Performing the calculations:

Present Value of Coupon Payments = $105 * [1 - (1 + 14%)^(-20)] / 14%

Present Value of Face Value = $1,000 / (1 + 14%)^20

Present Value of Callable Price = 1.1 * $1,000 / (1 + 14%)^10

Current Price of Bonds = Present Value of Coupon Payments + Present Value of Face Value + Present Value of Callable Price

Substituting the values and solving the equations, you can calculate the current price of the bonds.

To learn more about bonds:

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