You Are the Owner of 100 Bonds Issued by Euler

question 18

Multiple Choice

You are the owner of 100 bonds issued by Euler, Ltd.These bonds have 8 years remaining to maturity, an annual coupon payment of R80, and a par value of R1,000.Unfortunately, Euler is on the brink of bankruptcy.The creditors, including yourself, have agreed to a postponement of the next 4 interest payments (otherwise, the next interest payment would have been due in 1 year) .The remaining interest payments, for Years 5 through 8, will be made as scheduled.The postponed payments will accrue interest at an annual rate of 6 percent, and they will then be paid as a lump sum at maturity 8 years hence.The required rate of return on these bonds, considering their substantial risk, is now 28 percent.What is the present value of each bond?

• A) R538.21
• B) R426.73
• C) R384.84
• D) R266.88
• E) R249.98

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Definitions:

Marketable Securities

Financial instruments and assets that can be easily converted into cash, often with a maturity of less than a year, such as stocks or bonds.

Intangible Assets

Long-term assets that are useful in the operations of a business, are not held for sale, and are without physical qualities.

Gross Profit Margin

A financial ratio that shows the percentage of sales revenue remaining after deducting the cost of goods sold from total sales revenue.

Vertical Analysis

A financial statement analysis method that shows the relationship of each component to a total within a single statement, expressed as a percentage.