Question

HMK Enterprises would like to raise \$10.0 million to invest in capital expenditures. The company plans...

HMK Enterprises would like to raise \$10.0 million to invest in capital expenditures. The company plans to issue​ five-year bonds with a face value of \$1,000 and a coupon rate of 6.59% ​(annual payments). The following table summarizes the yield to maturity for​ five-year (annual-payment) coupon corporate bonds of various ratings.

Rating

AAA

AA

A

BBB

BB

YTM

6.19%

6.39%

6.59%

6.98%

7.58%

a. Assuming the bonds will be rated​ AA, what will the price of the bonds​ be?

b. How much of the total principal amount of these bonds must HMK issue to raise \$10.0 million​ today, assuming the bonds are AA​ rated? (Because HMK cannot issue a fraction of a​ bond, assuming that all fractions are rounded to the nearest whole​ number.)

c. What must be the rating of the bonds for them to sell at​ par?

d. Suppose that when the bonds are​ issued, the price of each bond is \$960.03. What is the likely rating of the​ bonds? Are they junk​ bonds?

1. The price of the Bond = \$ 1008.34

2. No of bonds to be issued = 10,000,000 / 1008.34 = 9917.33 or 9918 bonds

Face Value = 9918*1000 = \$ 9,918,000

The calculation in excel is shown below

3. The rate at which the Bodn will be sell at par i.e. \$ 1000 will be 6.59%. So rating should be A.

4. If issue price is = \$ 960.03, then yield is 7.58% So rating is BB. Since it is the lowest rating, so the bond is Junk Bond.