4. Pybus inc is considering issuing bonds that will mature in 16 years with an a

Question

4. Pybus inc is considering issuing bonds that will mature in 16 years with an annual coupon rate of 12 percent. Their par value will be $1000 and the interest will be paid semiannually . Pybus is hoping to 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 the receive an A rating the yield to maturity on similar A bonds is 8 percent. What will be the price of these bonds if they receive either an A or AA rating? (Round to nearest cent) there are two questions here

5. The market price is $1,075 for a 16 year bond ($1000 par value) that pays 12 percent annual interest but makes interest payments on a semiannual basis (6 % semiannually) WHats the bonds yield to maturity? (Round to two decimal places?

5.

Explanation / Answer

Bond Price = C * [1 - 1/(1+i)^n)] / i + M / (1+i)^n

If Rating is A, YTM = 7%,

in this case, C= coupon Payment = 12% * 1000 / 2 = $60

i = YTM = 7%

n = 16 years * 2 =32

M = Maturity Value = $1000

Bond price = 60 * [1- 1/(1+.07)^32] / .07 + 1000/(1+.07)^32

= $873.53

If rating is AA, YTM is 8%,

Bond Price = 60 * [1- 1/(1+.08)^32] / .08 + 1000/(1+.08)^32

= $771.30

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