Question

​(Bond valuation) ​Pybus, Inc. is considering issuing bonds that will mature in 20 years with an annual coupon rate of 8 percent. Their par value will be ​$1 comma 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 7.5 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 8.5 percent. What will be the price of these bonds if they receive either an A or a AA​ rating?

Answer 1

Price of A rating is $952.31

Price of AA rating is $1,051.38

Step-by-step explanation:

The price of the bond can be computed using the pv formula in excel which is stated thus:

=-pv(rate,nper,pmt,fv)

rate is the semiannual yield to maturity on the bond:

A rating has 4.25% semiannual yield (8.5%/2)

AA rating has 3.75% semiannual yield (7.5%/2)

nper is the number of coupon interest payable by the bonds which 2o years multiplied by 2 i.e 40 coupon interests for both types of bonds.

pmt is the amount of semiannual coupon interest which is $1000*8%/2=$40

fv is the face value of the bond of $1000

A rating Price

=-pv(4.25%,40,40,1000)=$952.31

AA rating price

=-pv(3.75%,40,40,1000)=$1,051.38