Question

HMK Enterprises would like to raise $11 million to invest in capital expenditures. The company plans to issue​ five-year bonds with a face value of $1,000 and a coupon rate of 8.8%

​(annual payments). The following table summarizes the yield to maturity for​ five-year (annual-pay) coupon corporate bonds of various ratings.

Rating	AAA	AA	A	BBB	BB
YTM​ (%)	8.2	8.4	8.8	9.0	9.4

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

b. How much total principal amount of these bonds must HMK issue to raise $11 million​ today, assuming the bonds are AA​ rated? (Because HMK cannot issue a fraction of a​ bond, assume all fractions are rounded to the nearest whole​ number.)

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

d. Suppose that when the bonds are​ issued, the price of each bond is $976.90.

What is the likely rating of the​ bonds? Are they junk​ bonds?

Note​:

Assume annual compounding.

Answer 1

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

Price of Bond = $1015.80

b. How much total principal amount of these bonds must HMK issue to raise $11 million​ today, assuming the bonds are AA​ rated? (Because HMK cannot issue a fraction of a​bond, assume all fractions are rounded to the nearest whole​number.)

Total bonds to be issued = Amount required / Bond Price

Total bonds to be issued = 11000000 / 1015.80

Total bonds to be issued = 10829 Bonds

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

to sell at par the bonds should be rated at yield rate equal to coupon rate of 8.80% i.e., A rated Bond

d. Suppose that when the bonds are​ issued, the price of each bond is $976.90.

Yield of bond = 9.40%

What is the likely rating of the​ bonds? Are they junk​bonds?

The ratings of Bond is BB rating. A bond is named junk when its rating is BB or lower Yes the bonds are junk bonds