Question

Face value for bonds is $1000 unless specified otherwise. Compounding is annual unless stated otherwise.

5. Ajax is interested in issuing 5-year bonds. Based on the yield curve, 5-year Treasury bonds have a yield of 4%. Ajax has a credit rating of AA. A credit rating of AA requires an additional 1.5% to compensate for default risk. What coupon rate will the bonds have?

6. Use the information below to estimate the price of a 2-year default free security with a face value of $1000 and an annual coupon of 6%. What is the yield to maturity on the bond?

Maturity	Zero Coupon Yields
1 year	5.6%
2 years	7.5%

Answer 1

Yield on Treasury bonds = 4.5%

Default risk yield = 1.5%

Yield on AA = 4.5 + 1.5 = 6%

So coupon rate = 6%

6.

Par value = 1000

coupon rate = 6%

Coupon payment = 1000*0.06 = 60

Yield on 1 year zero coupon = S1 = 5.6%

Yield on 2 year zero coupon = S2 = 7.5%

Price of bond = Coupon payment / (1+S1)^1 + Coupon payment / (1+S2)^2 + Par value  / (1+S2)^2

Price of bond = 60 / (1.056) + 60 / (1.075)^2 + 1000 / (1.075)^2

Price of bond = $ 974.07

Price ( PV )= $ 974.07

Coupon payment (PMT) = $60

Time (NPER) = 2

Par value (FV) = $1000

We can use RATE () function in excel to find Yield to maturity