Question

Your firm has a credit rating of A. You notice that the credit spread for 10-year maturity debt with a credit rating of A is 100 basis points (1%). Your firm’s ten-year debt has a coupon rate of 1.2% and face value of $1,000. You see that new 10-year Treasury notes are being issued at par with a coupon rate of 1.5%. What should the price of your outstanding 10-year bonds be?

Answer 1

Your firm’s YTM = 1.5% + 1% = 2.5%

Semiannual discount rate = 2.5%/2 = 1.25%

Semiannual coupon payment = ($1000 x 1.2%)/2 = $6

Par Value ($)	1000
Coupon rate	1.20%
YTM	2.50%
Payment frequency	2
Time to maturity (t)	10
Bond price (PV) ($)	885.60

Using the above formula and substituting the values, we get the bond price as $885.60