Question

Question 4

HMK Enterprises would like to raise $10 million to invest in capital expenditures. The company plans to issue 5-year bonds with a face value of $1,000 and a coupon rate of 6.52% (annual payments). The following table summarizes the yield to maturity for 5-year (annual-payment) coupon corporate bonds of various ratings:

a. Assuming the bonds will be rated AA, what will be the price of the bonds?

a. $856.32

b. $987.45

c. $999.66

d. $1,008.77

e. $1,019.88

b. How much of the total principal amount of these bonds must HMK issue to raise $10.0million today, assuming the bonds are AA rated? (Because HMK cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number.)

a. $5,605,000

b. $6,322,000

c. $7,243,000

d. $8,803,000

e. $9,914,000

c. What must be the rating of the bonds for them to sell at par?

1. AAA grade

2. AA grade

3. A grade

4. BBB grade

5. BB grade

d. Suppose that when the bonds are issued, the price of each bond is $958.38. What is the likely rating of the bonds? Are they junk bonds?

1. AAA grade, they are not junk bonds

2. AA grade, they are not junk bonds

3. A grade, they are not junk bonds

4. BBB grade, they are junk bonds

5. BB grade, they are junk bonds

Answer 1