Question

In: Finance

 ​Pybus, Inc. is considering issuing bonds that will mature in 25 years with an annual coupon...

 ​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?

Solutions

Expert Solution

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


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