Question

?(Related to Checkpoint? 9.3)???(Bond valuation)???Pybus, Inc. is considering issuing bonds that will mature in 18 years with an annual coupon rate of 9 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 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 they 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 the nearest? cent.)

b. The price of the Pybus bonds if they receive a A rating will be

?$? (Round to the nearest? cent.)

Answer 1

(A). The price of the Pybus bonds if they receive a AA rating will be $1,202.90

Par Value of the bond = $1,000

Coupon Amount           = $45 [ ($1,000 x 9%) x ½ ]

Yield to Maturity = 3.50% [9% x ½]

Maturity Period = 18 Years x 2 = 36 Years

Price of the Bond = Present Value of the Coupon Payments + Present Value of the Par Value

= $45 [PVIFA 3.50%, 36 Years] + $1,000[PVIF 3.50%, 36 Years]

= [$45 x 20.29049] + [$1,000 x 0.289833]

= $913.07 + 289.83

= $1,202.90

(B). The price of the Pybus bonds if they receive a A rating will be $1,094.54

Par Value of the bond    = $1,000

Coupon Amount           = $45 [ ($1,000 x 9%) x ½ ]

Yield to Maturity = 4% [8% x ½]

Maturity Period             = 18 Years x 2 = 36 Years

Price of the Bond = Present Value of the Coupon Payments + Present Value of the Par Value

= $45 [PVIFA 4%, 36 Years] + $1,000[PVIF 4%, 36 Years]

= [$45 x 18.908281] + [$1,000 x 0.2436687]

= $850.87 + 243.67

= $1,094.54