Question

Pybus, Inc is considering issuing bonds that will mature in 18 years with an annual coupon rate of 6%. Their par value will be $1,000 and the interest will be paid semiannually. Pybus is hoping to get AA rating on its bonds and, if it does, the yield to maturity on similar AA bonds is 8.5%. 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%. What will be the price of these bonds if they receive either an A or a AA rating?

Answer 1

Price of the Pybus Inc bond if it received a AA rating:

Information provided:

Par value= future value= $1,000

Time= 18 years*2= 36 semi-annual periods

Coupon rate= 6%/2= 3%

Coupon payment= 0.03*1,000= $30

Yield to maturity= 8.5%/2= 4.25%

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

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 36

PMT= 30

I/Y= 4.25

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

The value obtained is 771.62.

Therefore, the price of the bond with AA rating bond is $771.62.

Price of the Pybus Inc bond if it received a A rating:

Information provided:

Par value= future value= $1,000

Time= 18 years*2= 36 semi-annual periods

Coupon rate= 6%/2= 3%

Coupon payment= 0.03*1,000= $30

Yield to maturity= 9.5%/2= 4.75%

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

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 36

PMT= 30

I/Y= 4.75

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

The value obtained is 700.89.

Therefore, the price of the bond with A rating bond is $700.89.

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