Lenny D. answered • 05/10/20

Financial Professional with many years of Wall Street Experience

Very Interesting Question Monica and lots of Fun. A bond with 7% coupon paid quarterly has coupons of $17.5.

With 12 years to go we have 48 payment periods. The price of the bond is the annuity value of the coupons plus the PV of the principal.. Use the Annuity Formula to value the coupon stream and discount the face value at a 15% rate to come up with the price of the bond.

I assume your professor wants you to continue to discount the coupoun stream at 15% and simply adjust the expected redemption value of the principal. The expected value of the face is (0*.3 +.5*.4 +.3*.8) = 48% of Face. So discount 480 dollars back to PV at 15% and add that to the annuity value of the coupon stream to come up with the new bond price.

If you have any questions please feel free to reach out. I have been discounting cash flows longer than Tom Brady has been throwing footballs.