Question

HMK Enterprises would like to raise $ 10.0 million to invest in capital expenditures. The company plans to issue​ five-year bonds with a face value of $ 1000 and a coupon rate of 6.51 % ​(annual payments). The following table summarizes the yield to maturity for​ five-year (annual-payment) coupon corporate bonds of various​ ratings:

Rating	AAA	AA	A	BBB	BB
YTM	6.13​%	6.36​%	6.51​%	6.94​%	7.53​%

a. Assuming the bonds will be rated​ AA, what will be the price of the​ bonds?

b. How much of the total principal amount of these bonds must HMK issue to raise $ 10.0 million​ today, assuming the bonds are AA​ rated? (Because HMK cannot issue a fraction of a​ bond, assume that all fractions are rounded to the nearest whole​ number.)

c. What must be the rating of the bonds for them to sell at​ par?

d. Suppose that when the bonds are​ issued, the price of each bond is $958.76. What is the likely rating of the​ bonds? Are they junk​ bonds?

Answer 1

Solution:

Part A )

Coupon is 6.51% and Face value is 1000 hence coupon payment = 1000 * 6.51% = 65.1

Price of the bond = 1006.26

Part B )

The firm wants to raise $10 million and bond price is 1006.26 hence they will need to raise

10,000,000 /1006.26 = 9937.82 = 9,938 bonds

Face value of these bonds are 1000 hence

Principal= 9,938*1000 = 9,938,000

Part C )

In order to sell the bond at par the coupon and YTM should be equal. Coupon is 6.51% and A rated bond has YTM of 6.51% hence the rating of bond should be A

Part D )

With the help of goal seek function we can find the YTM and it is 7.53%. This is for BB rating hence it is junk bond