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Pybus, Inc
Pybus, Inc. is considering issuing bonds that will mature in 25 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 9 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 10 percent. What will be the price of these bonds if they receive either an A or a AA rating?
Expert Solution
We can calculate the price of bond if they receive A rating by using the following formula in excel:-
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of bond
Rate = 10%/2 = 5% (semiannual)
Nper = 25*2 = 50 periods (semiannual)
Pmt = Coupon payment = $1,000*7%/2 = $35
FV = $1,000
Substituting the values in formula:
= -pv(5%,50,35,1000)
= $726.16
We can calculate the price of bond if they receive AA rating by using the following formula in excel:-
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of bond
Rate = 9%/2 = 4.5% (semiannual)
Nper = 25*2 = 50 periods (semiannual)
Pmt = Coupon payment = $1,000*7%/2 = $35
FV = $1,000
Substituting the values in formula:
= -pv(4.5%,50,35,1000)
= $802.38
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