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Atlantic Airlines Case 15
Bond Valuation
Purpose: The case is intended to increase the student’s skills in bond valuation. To make matters more
interesting the top of junk bonds is introduced and becomes the central focus of the discussion and the
calculations. The student is asked to consider whether the higher yield on the bonds is adequate to cover
potential downside exposure.
Relation to Text: The case should follow Chapter 10.
Complexity: The case is moderately complex and should require 45 minutes to an hour.
Solutions
1. Find the bond price
Present value of interest payments
Present value of pricinipal payment at maturity
2. Decline in value
Interest rate advantage
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
3. Find the new bond price
Present value of interest payments
Present value of principal payment at maturity
Decline in value
4. Tom definitely comes out ahead. The bonds will increase in value due to the decline in yield in the
5. No. Tom will merely collect the initial $1,000 par value at maturity. Changes in the value of the bond
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
