Question

Your investment department has researched possible investments in corporate debt securities. Among the available investments are...

Your investment department has researched possible investments in corporate debt securities. Among the available investments are the following $100 million bond issues, each dated January 1, 2021. Prices were determined by underwriters at different times during the last few weeks. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Company Bond Price Stated Rate
1. BB Corp. $ 109 million 11 %
2. DD Corp. $ 100 million 10 %
3. GG Corp. $ 91 million 9 %


Each of the bond issues matures on December 31, 2040, and pays interest semiannually on June 30 and December 31. For bonds of similar risk and maturity, the market yield at January 1, 2021, is 10%.

Required:
Other things being equal, which of the bond issues offers the most attractive investment opportunity if it can be purchased at the prices stated? The least attractive?

Most Attractive Investment:______

Least Attractive Investment:_____

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Answer #1

Answer:

Calculate the price of the bond as follows:

BB Corp

Particulars Amount ($)
Interest (100 million x 5.5% x 17.1591) 94375050
Principal (100 million x 0.14205) 14205000
Price of the bond 108580050

DD Corp

Particulars Amount ($)
Interest (100 million x 5% x 17.1591) 85795500
Principal (100 million x 0.14205) 14205000
Price of the bond 100000500

GG Corp

Particulars Amount ($)
Interest (100 million x 4.5% x 17.1591) 77215950
Principal (100 million x 0.14205) 14205000
Price of the bond 91420950

GG Corp bond issue offers the most attractive investment oppotunity. On the other hand BB Corp bond issue offers the lease attractive investment opportunity.

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