Question

In: Finance

a, This bond is callable. This means that

Issuer Symbol Callable Coupon _rate Maturity Moody Rating Price Yield

MMM BRK3680632 Yes 7% 10/21/2030 Aa3 120 _____

MMM bondholders can convert bond to stocks when the bond is called.
MMM company is expected to call back this bond when the market interest rate decreases.
MMM is expected to call back this bond when MMM stock price increases.
MMM is expected to call back this bond when MMM stock price decreases.

b, The coupon rate is 7% annually. How much is the annual coupon?

$0.7
$7
$70
$700

c, Moody’s rating of this bond is Aa3. Who is Moody? What about the ranking, Aa3?

Moody is MMM’s financial partner. Aa3 is a low ranking.
Moody is a bank. Aa3 is a low ranking.
Moody is a mutual fund. Aa3 is a top ranking.
Moody is a bond ranking agency. Aa3 is a top ranking.

d, The current market price of this bond is 120, meaning the bond is traded at 120%*1000=$1200 in the market. This annual bond pays annual coupon at coupon rate of 7%. The bond has 10 years left to maturity. Calculate the yield to maturity (yield) of this bond? (hint: use rate function and consider this is an annual coupon bond)

4.07%
4.48%
5.08%
4.11%

Solutions

Expert Solution

Question (a)

This bond is callable. This means that:

Answer = b. MMM company is expected to call back this bond when the market interest rate decreases.

Question (b)

The coupon rate is 7% annually. How much is the annual coupon?

Answer = c. $70

(Reason = Market price is quoted at 120 (not dollar 120), which means that the market price is 120% of the par value $1000. Therefore, Par value of the bond is $1000, therefore annual coupon = $1000 x 7% = $70.)

Question (c)

Who is Moody? What about the ranking, Aa3?

Answer = d. Moody is a bond ranking agency. Aa3 is a top ranking.

Question (d)

FV = $1000

PV = -$1200

PMT = $70

N = 10

Inputting these values in financial calculator, then pressing "CPT", "I/Y", we get,

I/Y = 4.48%

Therefore, Answer = b. 4.48%

jeff jeffy answered 1 year ago

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