Question

Pybus, Inc. is considering issuing bonds that will mature 22years with an annual coupon rate of 11 percent. Their par value will be $1,000, 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 11.5 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 12.5 percent. What will be the price of these bonds if they receive either an A or a AA rating?

a. The price of the Pybus bonds if they receive a AA rating will be $(?)

b. The price of the Pybus bonds if they receive a A rating will be $(?)

Answer #1

A) Using financial calculator to calculate the price of bond having AA rating

Inputs: N= 22 × 2 = 44 (semiannual compounding)

I/y= 11.5% / 2 = 5.75%

Pmt= 11% / 2 × 1,000 = 55

Fv= 1,000

Pv= compute

We get, price of the bond receiving AA rating as
**$960.24**

B) Using financial calculator to calculate the price of bond having A rating

Inputs: N= 22 × 2 = 44

I/y= 12.5% / 2 = 6.25%

Pmt= 11% / 2 × 1,000 = 55

Fv= 1,000

Pv= compute

We get, price of the bond receiving AA rating as
**$888.33**

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