Question

Your firm has a credit rating of A. You notice that the credit spread for five-year maturity A debt is 85 basis points (0.85%). Your firm's five-year debt has an annual coupon rate of 6.2%. You see that new five-year Treasury notes are being issued at par with an annual coupon rate of 1.6%. What should be the price of your outstanding five-year bonds?

The price of the bond is

Answer #1

The YTM of the Corporate Bond = Risk-Free rate + Credit Spread

= 1.6 + 0.85

= 2.45

You need to use a Financial calculator to solve this problem. You can download it.

N = 5 (The Bond is for 5 Years)

PMT = 6.2% of 1,000 = -62 ( The coupon 6.2% is on Face Value, which is considered to be $1000)

FV = -1,000 (The Face value of bond is $1,000)

I/Y = 2.45 (The YTM of the bond is 2.45%)

CPT + PV = 1,174.4696

So the price of the bond is $1,174.4696

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