On November 1, 2013, Matthew Corp. sold a $600 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 November 1, 2033. The bonds have a coupon rate of 8.00% with interest paid semiannually. Required:Determine the value today, November 1, 2023 of one of these bonds to an investor who requires a 10 percent return on these bonds. Why is the value today different from the par value?Assume that the bonds are selling for $870.00. 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 Matthew’s bonds.For each of the following events, explain what the impact would be on the yield-to-maturity:The bond is downgraded by a rating agency.The economy seems to be shifting from a recession to a boom economy.The bond is subordinated to other bonds.Congressional hearings provide pressure on Matthew to significantly reduce the price on several of their products.

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Answered: On November 1, 2013, Matthew Corp. sold…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 17P

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On November 1, 2013, Matthew Corp. sold a $600 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 November 1, 2033. The bonds have a coupon rate of 8.00% with interest paid semiannually.

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Determine the value today, November 1, 2023 of one of these bonds to an investor who requires a 10 percent return on these bonds. Why is the value today different from the par value?
Assume that the bonds are selling for $870.00. 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 Matthew’s bonds.
For each of the following events, explain what the impact would be on the yield-to-maturity:
1. The bond is downgraded by a rating agency.
2. The economy seems to be shifting from a recession to a boom economy.
3. The bond is subordinated to other bonds.
4. Congressional hearings provide pressure on Matthew to significantly reduce the price on several of their products.

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For each of the following events, explain what the impact would be on the yield-to-maturity:

1. The bond is downgraded by a rating agency.
2. The economy seems to be shifting from a recession to a boom economy.
3. The bond is subordinated to other bonds.

Congressional hearings provide pressure on Matthew to significantly reduce the price on several of their products

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