Question

In: Finance

Company X needs to sell new bonds for financing purpose. Company X’s currently outstanding bonds have...

Company X needs to sell new bonds for financing purpose. Company X’s currently outstanding bonds have a $ 1000 par value, a 10 % coupon rate, and pay interest semiannually. The outstanding bonds have 25 years remaining to maturity, are callable after 5 years at a price of $ 1,090, and currently sell at a price of $ 700. The yield curve is expected to remain flat. On the basis of these data, what is the best estimate of company’s nominal interest rate on the new bonds it plans to sell?

Solutions

Expert Solution

On the new bonds, the nominal interest rate will equal the yield on the current outstanding bonds.

The yield on the current outstanding bonds will be the lower of yield-to-call (YTC) or yield-to-maturity (YTM). We take the lower yield, since that is the yield earned by bondholder.

YTM is calculated using RATE function in Excel with these inputs :

nper = 25*2 (25 years to maturity with 2 semiannual coupon payments each year)

pmt = 1000 * 10% / 2 (semiannual coupon payment = face value * annual coupon rate / 2. This is a positive figure as it is an inflow to the bondholder)

pv = -700 (Current bond price. This is a negative figure as it is an outflow to the buyer of the bond)

fv = 1000 (face value of the bond receivable on maturity. This is a positive figure as it is an inflow to the bondholder)

The RATE calculated is the semiannual YTM. To calculate the annual YTM, we multiply by 2.

Annual YTM is 14.48%

YTC is calculated using RATE function in Excel with these inputs :

nper = 5*2 (5 years to call date with 2 semiannual coupon payments each year)

pmt = 1000 * 10% / 2 (semiannual coupon payment = face value * annual coupon rate / 2. This is a positive figure as it is an inflow to the bondholder)

pv = -700 (Current bond price. This is a negative figure as it is an outflow to the buyer of the bond)

fv = 1090 (call price of the bond receivable on call date. This is a positive figure as it is an inflow to the bondholder)

The RATE calculated is the semiannual YTC. To calculate the annual YTC, we multiply by 2.

Annual YTC is 21.10%

The lower of YTM and YTC is the YTM, which is 14.48%

nominal interest rate on new bonds =  14.48%

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Company X’s bonds have 25 years remaining to maturity. They have a $1,000 par value, the...
Company X’s bonds have 25 years remaining to maturity. They have a $1,000 par value, the coupon interest rate is 7%, and the yield to maturity is 10%. If you know that interest is paid annually, what is the bond’s current market price? $ 658.32 $ 727.69 $ 872.58 $ 987.78 $ 1,000 Najd company decided to issue preferred stock that would pay an annual dividend of $10.00 and that the issue price was $200.00 per share. What would be...
Company ABC currently has the following financing outstanding. Bond: 10,000 10-year zero coupon bonds with a...
Company ABC currently has the following financing outstanding. Bond: 10,000 10-year zero coupon bonds with a quoted price of $500 (par value is $1000). Common Stock: 50,000 shares of common stock. The company just paid $2 per share dividends to its investors. The dividends are expected to be constant in the future. The beta of the stock is 1.1. The company is considering a new project which has the similar risk as the existing business. The market portfolio’s expected return...
Ford Motor Company has bonds that currently sell for $1,140 and have a par value of...
Ford Motor Company has bonds that currently sell for $1,140 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)? Group of answer choices 8.07% 7.74% 8.62% 7.35%
Company Triple A semi-annual bonds currently sell for $1,055. They have a 5.50% coupon rate and...
Company Triple A semi-annual bonds currently sell for $1,055. They have a 5.50% coupon rate and a 25-year maturity and are callable in 6 years at $1,100.00. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if...
Meacham Enterprises' bonds currently sell for $1,280 and have a par value of
1. Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?2. Currently, Bruner Inc.'s bonds sell for $1,250. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other...
The firm currently has one issue of bonds outstanding. The bonds have a par value of...
The firm currently has one issue of bonds outstanding. The bonds have a par value of ​$1 comma 000 per​ bond, carry a coupon rate of 8 ​percent, have 14 years to​ maturity, and are selling for ​$1, 070. ​Nealon's common stock has a current market price of $ 36​, and the firm paid a ​$2.60 dividend last year that is expected to increase at an annual rate of 6 percent for the foreseeable future. What is the cost of...
The firm currently has one issue of bonds outstanding. The bonds have a par value of...
The firm currently has one issue of bonds outstanding. The bonds have a par value of $1,000 per​ bond, carry a coupon rate of 8 percent, have 14 years to​ maturity, and are selling for ​$1,070.​Nealon's common stock has a current market price of $ 36 and the firm paid a $2.60 dividend last year that is expected to increase at an annual rate of 6 percent for the foreseeable future. A) What is the weighted average cost of capital...
7. Company Triple A semi-annual par value bonds currently sell for $1,055. They have a 5.50%...
7. Company Triple A semi-annual par value bonds currently sell for $1,055. They have a 5.50% coupon rate and a 25-year maturity and are callable in 6 years at 8% premium. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of returns should an investor...
3. A company’s bonds currently sell for $1,200. The bonds have a 6-year maturity, a 6%...
3. A company’s bonds currently sell for $1,200. The bonds have a 6-year maturity, a 6% coupon paid semi-annually, and a par value of $1,000. What is the nominal yield to call (YTC) on these bonds (to one decimal place, e.g., 5.1%)?
A corporation’s bonds currently sell for $1,200. The bonds have a 5-year maturity, an annual coupon...
A corporation’s bonds currently sell for $1,200. The bonds have a 5-year maturity, an annual coupon of $90, and a par value of $1,000. What is the current yield of these bonds (to two decimal places, e.g., 5.10%)? A corporation’s non-callable bonds currently sell for $1,150. The bonds have a 15-year maturity, a 6% annual coupon paid annually, and a par value of $1,000. What is the yield to maturity of these bonds (to two decimal places, e.g., 5.10%)? A...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT