AirJet Best Parts, Inc. would like to issue 20-year bonds to obtain remaining fu

Question

AirJet Best Parts, Inc. would like to issue 20-year bonds to obtain remaining funds for the new Mexico plant. The company currently has 7.5% semiannual coupon bonds in the market that sell for $1,062 and mature in 20 years.

1. What coupon rate should AirJet Best Parts set on its new bonds to sell them at par value?

2. What is the difference between the coupon rate and the YTM of bonds? (10 pts)

3. What factors will contribute to the riskiness of these bonds? Explain in detail your rationale.

4. What type of positive and negative covenants may AirJet Best Parts, Inc. use in future bond issues?

Explanation / Answer

annul rate=7.50% Current price bond=$1,062 Term= 20 Par value of bond= 1000 Annual interest= $75 Sem—annual interest= $ 37.50 1,062 =$ 37.50 x 1-(1+YTM/2)^-40) / YTM/2 + 1000/ 1+ (YTM/2)^40 YTM= 6.92% 1000 = C(1000) x (1-(1.0692)^-20) / 6.92% + 1000 (1.0692)^ 20 1000 = C(1000) x 10.66020643 + 262.3137151 C= 1000- 262.3137151 / 10660.20643 C= 6.92%

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