Question

Pybus, Inc. is considering issuing bonds that will mature in 25 years with an annual coupon rate of 6 percent. Their par value will be $1 000 , 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 9.5 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 10.5 percent. What will be the price of these bonds if they receive either an A or a AA rating? a. The price of the Pybus bonds if they receive a AA rating will be?

Answer 1

Case1: If Plybus Inc gets AA rating

Information provided:

Par value= future value= $1,000

Time= 25 years*2= 50 semi-annual periods

Coupon rate= 6%/2= 3%

Coupon payment= 0.03*1,000= $30

Yield to maturity= 9.5%/2= 4.75% per semi-annual period

The price of the bond is calculated by computing the present value of the bond.

Enter the below in a financial calculator to calculate the present value of the bond:

FV= 1,000

N= 50

PMT= 30

I/Y= 4.75

Press the CPT key and PV to compute the present value of the bond.

The value obtained is 667.77.

Therefore, the price of the bond if Plybus Inc gets AA rating is $667.77.

Case2: If Plybus Inc gets A rating

Information provided:

Par value= future value= $1,000

Time= 25 years*2= 50 semi-annual periods

Coupon rate= 6%/2= 3%

Coupon payment= 0.03*1,000= $30

Yield to maturity= 10.5%/2= 5.25% per semi-annual period

The price of the bond is calculated by computing the present value of the bond.

Enter the below in a financial calculator to calculate the present value of the bond:

FV= 1,000

N= 50

PMT= 30

I/Y= 5.25

Press the CPT key and PV to compute the present value of the bond.

The value obtained is 604.61.

Therefore, the price of the bond if Plybus Inc gets AA rating is $604.61

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