In: Finance
Pybus, Inc. is considering issuing bonds that will mature in 25 years with an annual coupon rate of 7 percent. Their par value will be $1,000, 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 11.5 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 12.5 percent. What will be the price of these bonds if they receive either an A or a AA rating?
Price of the bond if they receive an A rating:
=PV(rate,nper,pmt,fv)
=PV(12.5%/2,25*2,-7%/2*1000,-1000)
=581.23
Price of the bond if they receive an AA rating:
=PV(11.5%/2,25*2,-7%/2*1000,-1000)
=632.60
Where,
rate is periodic rate of return,
nper is no of periods till maturity,
pv is present value of bond
fv is redemption price of bond