Question

Issuer:                                                   Environmental Technologies Corporation
Standard and Poor rating:             AA
Par value:                                            $100,000
Coupon rate:                                      7% per annum
Coupon payment:                            Paid semiannually
Maturity date:                                   Ten years – December 31, 2026

A) What is the dollar amount of the coupon payment every six months? _______________

B) Is the coupon payment a fixed or variable rate? ____________

C) Is this bond investment grade? (Yes or No) ________________

D) What amount is Environmental Technologies Corporation promising to pay investors at maturity? ______________.

E) If you invested in this bond, are you permitted to sell it before maturity? (Yes or No) _____________.

F) Environmental Technologies Corporation’s bond is not callable. If Conservation Services Corporation sold a bond that was like the Environmental Technologies Corporation bond in every respect, except that the Conservation Services Corporation bond had a call provision, which bond would need to offer investors a higher yield? _____________________________________________________________

Answer 1

Answer:

A)           Amount of Coupon = Face Value of Bond * Coupon Rate * 6/12

                                                      = 100,000 * 7% * 6/12 = $3,500 every six month

B)            Coupon payment is a fixed rate i.e. 7% per annum. Moreover, bond will be retired at maturity date in lump sum payment.

C)            S & P rates the long term instrument with rating ranging from ‘AAA to C’ and ‘D’.

Rating “AAA, AA, A and BBB” are considered as investment grade denoting good capacity to repay.

Rating “BB, B, CCC, CC, and C” are considered as speculative grade denoting denoting exposure to adverse conditions.

Rating “D” is in default obligation.

Yes, the bond investment with AA rating by S&P is of Investment grade.

D)           At the maturity date, Environmental Technologies Corporation will repay the face value of the bond as coupon payment is made regularly during the life of bond.

                Amount = $1,00,000