Question

Goodnews Corp in March 2020 issued bonds with face value of USD 500m maturing in February 2030. The bond promised to make 20 semi-annual coupon payments (starting 10.15.2020) at annual rate of 2.50%. At issuance, the bond was priced with a yield to maturity (YTM) of 2.6150% (APR). Determine the price investors paid for this bond at issuance (per $100 of face value). How much (before banker’s fees) did Goodnews Corp collect from the bond purchasers given the size of the issue? If on July 27, 2020, this bond was trading for $108.18 per $100 of face value. With 20 semi-annual coupon payments still remaining (and ignoring the timing issue of the first coupon payment), determine the yield to maturity (YTM) on the bond (in APR) on this date. Given a benchmark of the current 10 UST yield, what is the current default spread for this Goodnews Corp security? How does this compare to the default spread at issuance?

Answer 1

1. Face value of Bond= $100

Rate of interest on Bond = 2.50%

YTM = 2.6150%

Payment cycle = Every six months

Formula for Bond price calculation =

[Interest/(1+I)]+[interest/(1+I)^2]....+[interest/(1+I)^n]+[Maturity value/(1+I)^n]

($1.25*0.9871)+($1.25*0.9744)...+($1.25*0.7712)+(100*0.7712)

Thus price paid by investors at issuance = $98.99

2. Amount collected by Goodnews Corp =

$98.99*5 million bonds = $494.95 million

3 YTM Calculation on 27th July =

(Coupan rate*Face value)/Market price

2.5%*100/108.18 = 2.31%

Thus yield to maturity is 2.31%

4. Current default spread on Bond =

10 year US treasury yield - Bond yield

7.72% - 2.31% = 5.41% or 541 basis points