Pybus. Inc. is considering issuing bonds that will mature in 22 years with an an
ID: 2710751 • Letter: P
Question
Pybus. Inc. is considering issuing bonds that will mature in 22 years with an annual coupon rate of II percent. Their par value will be $ 1 ,000, and the interest will be paid semiannually. Pybus is hoping to get a AA rating on its bonds and, if it does. (he yield to maturity on similar AA bonds is 7 percent. However. Pybus is not sure whether the new bonds will receive a AA rating. if they receive an A rating, the yield to maturity on similar A bonds is 8 percent. What will be the price of these bonds if (hey receive either an A or a AA rating? a. The price of the Pybus bonds if they receive a AA rating will be $. (Round to she nearest ccnt.) b. The price of the Pybus bonds if they receive an A rating will be $. (Round to the nearest cent.)Explanation / Answer
Bond Price = C x [1-[1/(1+i)^n]]/i+M/(1+i)^n
Interest is Paid Semi annually - so divide the coupon rate in half , The COupon rate is Percentage of the bonds par value , so Coupon VAlue = 1000x5.5%= $55
Semi Annual Yield when the bond has AA plus rating = 7%, half of 7% = 3.5%
Number of Coupon PAyment = 22x2 = 44
Bond Price = 55x[1-[1/(1+3.5%)^44]]/3.5%+1000/(1+3.5%)^44
Bond Price = $1445 when rating is AA plus
When RAting is A
Yield = 8% semi annual Yield = 4%
Number of Coupon PAyment = 22x2 = 44
Bond Price = 55x[1-[1/(1+4%)^44]]/4%+1000/(1+4%)^44
Bond Price = 1130.25+178 =$1308
Bond Price is $1308 when rating is A
Yield to MAturity = C+f-p/n/f+p/2
Yield to MAturity =90 +1000-1175/10/1000+1175/2
Yield to MAturity = 72.5/1088
Yield to MAturity = 6.67%
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