Question

Your firm has a credit rating of A You notice that the credit spread lor five-yoar malunty A dobt is 83 basis ponts Question list (0. 83\%) Your fifm's fivo-yoar has semi-annual cougons and a coupon tate of 8%. You soe that new five-yea! Government of Canada bonds are beirg essued with a YTM of 2% What shodid the price of your outstanding tive year bonds be? Assurne a par valese of $100

Answer 1

The price of the five-year corporate bond with a semi-annual coupon rate of 8% and a credit spread of 83 basis points over the Government of Canada bonds with a YTM of 2% is found by calculating the present value of all future cash flows, using a discount rate of 2.83%.

Step-by-step explanation:

The question is asking to calculate the price of a five-year bond with a credit rating of A, a credit spread of 83 basis points over Government of Canada bonds with a yield to maturity (YTM) of 2%, a semi-annual coupon rate of 8%, and a face value of $100.

To determine the price of the bond, we must calculate the present value of its cash flows, which consist of the semi-annual coupon payments and the repayment of the par value at maturity. The appropriate discount rate for these cash flows is the YTM of comparable Government bonds, adjusted for the credit spread to reflect the extra risk of the corporate bond. In other words, the discount rate will be the sum of the Government bond YTM (2%), and the credit spread (0.83%), totaling 2.83%. using the present value formula for each cash flow and summing them up will give us the bond's price. Remember, since the bond pays semi-annual coupons, we'll use half of the annual rate for the calculations and consider twice as many periods.