Question

Pybus, Inc. is considering issuing bonds that will mature in 20 years with an annual coupon rate of 8 percent. Their par value will be ​$1 comma 000​, 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 either an A or a AA​ rating?

Answer 1

The price of these bonds if they receive A rating

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 8.00% x ½]	PMT	40
Market Interest Rate or Yield to maturity on the Bond [9.50% x ½]	1/Y	4.75
Maturity Period/Time to Maturity [20 Years x 2]	N	40
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $866.78.

“Hence, the price of the A rating Bond will be $866.78”

The price of these bonds if they receive AA rating

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 8.00% x ½]	PMT	40
Market Interest Rate or Yield to maturity on the Bond [8.50% x ½]	1/Y	4.25
Maturity Period/Time to Maturity [20 Years x 2]	N	40
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $952.31

“Hence, the price of the AA rating Bond will be $952.31”