Question

(Bond valuation) Pybus, Inc. is considering issuing bonds that will mature in 16 years with an annual coupon rate of 9 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 7 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 8 percent. 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= 16 years*2= 32 semi-annual periods

Coupon rate= 9%/2= 4.50%

Coupon payment= 0.0451,000= $45

Yield to maturity= 7%/2= 3.50%

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= 32

PMT= 45

I/Y= 3.50

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

The value obtained is 1,190.69.

Therefore, the price of the bond with AA rating bond is $1,190.69.

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

Information provided:

Par value= future value= $1,000

Time= 16 years*2= 32 semi-annual periods

Coupon rate= 9%/2= 4.50%

Coupon payment= 0.0451,000= $45

Yield to maturity= 8%/2= 4%

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= 32

PMT= 45

I/Y= 4

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

The value obtained is 1,089.37.

Therefore, the price of the bond with A rating bond is $1,089.37.

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