Problem:
Sanders & Co. pays a 12 percent coupon rate on debentures that are due in 20 years. The current yield to maturity on bonds of similar risk is 10 percent. The bonds are currently callable at $1,060. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds. This is the normal definition we use.
1. Find the theoretical market value of the bonds using semiannual analysis.
2. Do you think the bonds will sell for the price you arrived at in part a? Why?"