Question

A bond's credit rating provides a guide to its price. Assume Aaa bonds yield 4.1% and Baa bonds yield 5.1%. Assume a 10% five-year bond with annual coupons and a face value of $1,000. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

a. What is the bond's price if it is rated as Aaa?

Bond price            $

b. What is the bond's price if it is rated as Baa?

Bond price            $

Answer 1

1.Price of the bond if it is rated is Aaa:

Information provided:

Face value= future value= $1,000

Yield to maturity= 4.10%

Time= 5 years

Coupon rate= 10%

Coupon payment= 0.10*1,000= $100

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

The below has to be entered in a financial calculator to calculate the present value:

FV= 1,000

I/Y=4.10

N= 5

PMT= 100

Press the CPT key and PV to calculate the present value.

The value obtained is 1,261.92.

The price of the Aaa bond is $1,261.92.

2. Price of the bond if it is rated is Aaa:

Information provided:

Face value= future value= $1,000

Yield to maturity= 5.10%

Time= 5 years

Coupon rate= 10%

Coupon payment= 0.10*1,000= $100

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

The below has to be entered in a financial calculator to calculate the present value:

FV= 1,000

I/Y=5.10

N= 5

PMT= 100

Press the CPT key and PV to calculate the present value.

The value obtained is 1,211.56.

The price of the Baa bond is $1,211.56.

In case of any query, kindly comment on the solution.