Pybus, Inc, is considering issuing bonds that will mature in 20 years with an an

Question

Pybus, Inc, is considering issuing bonds that will mature in 20 years with an annual coupon rate of 6 percent. Their per value will be $1,000, and the interest will be paid semiannually. Pybus is hoping in get a AA rating on its bonds and, if it does, the 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 on A rating, the yield to maturity on similar A bonds is B percent. What will be the price of these bonds if they receive either an A or a AA rating? The price of the Pybus bonds if they receive a AA rating will be

Explanation / Answer

1 Face value (FV) $                                         1,000 2 Coupon rate 6.00% 3 Number of compounding periods per year 2 4 = 1*2/3 Interest per period (PMT) $                                         30.00 5 Number of years to maturity 20 6 = 3*5 Number of compounding periods till maturity (NPER) 40 7 Market rate of return/Required rate of return 7.00% 8 = 7/3 Market rate of return/Required rate of return per period (RATE) 3.50% Bond price if they received AA rating PV(RATE,NPER,PMT,FV)*-1 Bond price if they received AA rating $                                       893.22

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