Question

Pybus, Inc. is considering issuing bonds that will mature in 22 years with an annual coupon rate of 9 percent. Their par value will be ​$1000 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 8.5 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 9.5 percent.

What will be the price of these bonds if they receive an A rating?

What will be the price if they receive an AA rating?

(Round to the nearest cent)

Answer 1

1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =22

Bond Price =∑ [(9*1000/100)/(1 + 9,5/100)^k]     +   1000/(1 + 9,5/100)^22

k=1

Bond Price = 954,5

Using Calculator: press buttons "2ND"+"FV" then assign

PMT = Par value * coupon %=1000*9/(100)

I/Y =9,5

N =22

FV =1000

CPT PV

Using Excel

=PV(rate,nper,pmt,FV,type)

=PV(9,5/(100),22,-9*1000/(100),-1000,)

2

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =22

Bond Price =∑ [(9*1000/100)/(1 + 8,5/100)^k]     +   1000/(1 + 8,5/100)^22

k=1

Bond Price = 1049

Using Calculator: press buttons "2ND"+"FV" then assign

PMT = Par value * coupon %=1000*9/(100)

I/Y =8,5

N =22

FV =1000

CPT PV

Using Excel

=PV(rate,nper,pmt,FV,type)

=PV(8,5/(100),22,-9*1000/(100),-1000,)