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This question was created from Problem 1In May 2011, Apache issued a 10-year, $263M bond paying 8.docx


Problem 1 In May 2011, Apache issued a 10-year, $263M bond paying
8.0% annually in two equal coupons each May and
November. It is now May 2015 and Apache just paid the May
coupon on its existing bond. Rates have come down so it is
thinking of buying back the bond and issuing a 5-year,
$330M bond. This bond matures in May 2020 and will pay
3.0% per year in equal coupons each May and November. a. What is the price that Apache must pay the current bond
holders to buy back the bond? (Hint - the present value of the
coupon payments and the final face value) b. What are the cash flows associated with the new bond? c. What are the cash flow differentials to Apache? In other
words, what are the net cash flows in or out for Apache each
May and November when comparing both bonds? (:1. What is the present value of these cash flow differentials? e. What does the answer to d tell you? Andrew Miren - X Nov

Top Answer

a. Semi-annual coupon = 263 M * 4% Remaining life = t = 6 years or 12 coupons Semi-annual yield = r = 1.5% The price Apache... View the full answer

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