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ybus, Inc
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?
Expert Solution
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
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