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ybus, Inc

Finance

ybus, Inc. is considering issuing bonds that will mature in

21 years with an annual coupon rate of

7 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

12 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

13 percent. What will be the price of these bonds if they receive either an A or a AA? rating?

 

 

The price of the Pybus bonds if they receive a AA rating will be how much?

pur-new-sol

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Computation of Price of Bonds If they receive AA ratings:

=-pv(rate,nper,pmt,fv)

Here,

PV = Price of Bonds = ?

Rate = 12%/2 = 6% compounded semiannually

Nper = 21 years * 2 = 42 Periods

PMT = $1,000*7%/2 = $35

FV = $1,000

Substituting the values in formula:

=-pv(6%,42,35,1000)

PV or Price of Bonds = $619.39

 

Computation of Price of Bonds If they receive A ratings:

=-pv(rate,nper,pmt,fv)

Here,

PV = Price of Bonds = ?

Rate = 13%/2 = 6.5% compounded semiannually

Nper = 21 years * 2 = 42 Periods

PMT = $1,000*7%/2 = $35

FV = $1,000

Substituting the values in formula:

=-pv(6.5%,42,35,1000)

PV or Price of Bonds = $571.24