4. (Related to Checkpoint 9.3) (Bond valuation) Pybus, Inc. is considering issui

Question

4. (Related to Checkpoint 9.3) (Bond valuation) Pybus, Inc. is considering issuing bonds that will mature in 18 years with an annual hoping Pybus is not sure whether the new bonds will receive a AA rating. If they receive an A rating, the yield to maturity on sim I coupon rate of 9 percent. Their par value will be $1,000, and the interest will be paid semiannually. Pybus is to get a AA rating on its bonds and, if it does, the yield to maturity on similar AA bonds is 7.5 percent. However, A bonds is 8.5 percent. What will be the price of these bonds if they receive either an A or a AA rating? a. The price of the Pybus bonds if they receive a AA rating will be $ b. The price of the Pybus bonds if they receive an A rating will be $ (Round to the nearest cent.) . (Round to the nearest cent.)

Explanation / Answer

price of bond = coupon payment * [1-(1+i)^-n ]/i + facevalue/(1+i)^n

a)

price = 90/2 * [1-(1+7.5%/2)^-36]/7.5%/2 + 1000/(1+7.5%/2)^36

= 1146.86

b)

price = 90/2 * [1-(1+8.5%/2)^-36]/8.5%/2 + 1000/(1+8.5%/2)^36

= 1010.31

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