Question

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?

Answer 1

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.