Question

A firm issues

tenten​-year

bonds with a coupon rate of

6.86.8​%,

paid semiannually. The credit spread for this​ firm's

tenten​-year

debt is​ 0.8%. New

tenten​-year

Treasury notes are being issued at par with a coupon rate of

3.73.7​%.

What should the price of the​ firm's outstanding

tenten​-year

bonds be per​ $100 of face​ value?

A.

$ 165.70$165.70

B.

$ 142.03$142.03

C.

$ 94.69$94.69

D.

$ 118.36

Answer 1

Face Value of Bond = $ 100

Semi-annual coupon payment = $100*6.8%*1/2 = $3.4

No of years to maturity = 10

n = 10 years * 2 = 20

10 years credit Spread = 0.8%

New 10-year Treasury Note rate = 3.7%

YTM = 3.7% + 0.8% = 4.5%

Semi-annual YTM = 4.5%/2

= 2.25%

Calculating the price of the​ firm's outstanding ten​-year bonds :-

Price = $ 54.2766 + $ 64.082

Price = $ 118.36

So, the  price of the​ firm's outstanding ten​-year bonds is $118.36

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