Question

our 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 bon ds be?

Answer 1

Bond Price Formula = Coupon Rate x Face Value of The Bond x {1-(1+R)^-n/R} + Face Value of The bond/(1+R)^n

where N is the no. of years

No. of years = 10 Years

C = Coupon Rate = 1.2% (Assumed Annual Coupon)

and R = YTM of the Bond

Given that treasury notes are trading at par therefore when a bond trades at par its Yield to Maturity = Coupon Rate

Therefore YTM of Treausry = 1.5%

Now given the credit rating of A we need to add 100 basis points to arrive at the YTM of the bond issued by the company. Therefore the YTM of the bond issued by the company = 1.5% + 1% = 2.5%.

Now Bonds Price = 1.2% *1000 *{1-(1.025)^-10/0.25} + 1000/(1.025)^10

Bonds Price = 105.024+ 781.1984

Bonds Price = $886.223