Question

Your firm has a credit rating of A. You notice that the credit spread for five-year maturity A debt is 80 basis points (0.80%). Your firm's five-year debt has an annual coupon rate of 6.4%. You see that new five-year Treasury notes are being issued at par with an annual coupon rate of 2.1%. What should be the price of your outstanding five-year bonds? Assume $1,000 face value. Assuming a $1,000 face value, the price of the bond is $ (Round to the nearest cent.)

Answer 1

The price of your firm's outstanding five-year bonds with a face value of $1,000 would be $793.10.

Step-by-step explanation:

The price of your firm's outstanding five-year bonds can be calculated using the present value formula. The present value of each year's interest payment and the face value of the bond is discounted using the bond's yield or discount rate, which is the market rate of return required by investors. In this case, since the coupon rate of your firm's bonds is 6.4% and the credit spread for similar debt is 0.80%, the yield on the bond would be 7.20% (6.4% + 0.80%).

Using the present value formula, you can calculate the present value of each year's payments using the yield. The present value of the $80 interest payment for the last year is $76.92 ($80 / (1 + 0.072)), and the present value of the $1,000 face value is $716.18 ($1000 / (1 + 0.072)^5). Adding these present values gives a total present value of $793.10.

Therefore, the price of your outstanding five-year bonds with a face value of $1,000 would be $793.10 (rounded to the nearest cent).