The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

Value of Firm's Debt is $541.20

Explanation:

Coupon payment = 1000 x 4% = $40 / 2 = $20

Number of periods = n = 10 years x 2 = 20

Face value = $1,000

YTM = 12% / 2 = 6% = 0.06

Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula:

Price of the Bond = C x [ (1 - (1 + r) ^-n) / r ] + [ F / (1 + r) ^n ]

Price of the Bond = $20 x [ (1 - (1 + 6%) ^-20) / 6% ] + [ $1,000 / (1 + 6%) ^20 ]

Price of the Bond = $20 x [ (1 - (1.06) ^-20) / 0.06 ] + [ $1,000 / (1.06) ^20 ]

Price of the Bond = $229.4 + $311.80

Price of the Bond = $541.20