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?Pybus, Inc
?Pybus, Inc. is considering issuing bonds that will mature in 17 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 11.5 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 12.5 percent. What will be the price of these bonds if they receive either an A or a AA? rating?
Expert Solution
AA rating:
We can calculate the price of the bond by using the following formula in excel:-
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of the bond
Rate = 11.5%/2 = 5.75% (semiannual)
Nper = 17*2 = 34 periods (semiannual)
Pmt = Coupon payment = $1,000*9%/2 = $45
FV = $1,000
Substituting the values in formula:
= -pv(5.75%,34,45,1000)
= $815.10
A rating:
We can calculate the price of the bond by using the following formula in excel:-
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of the bond
Rate = 12.5%/2 = 6.25% (semiannual)
Nper = 17*2 = 34 periods (semiannual)
Pmt = Coupon payment = $1,000*9%/2 = $45
FV = $1,000
Substituting the values in formula:
= -pv(6.25%,34,45,1000)
= $755.64
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