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.

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five-year (annual payments) coupon corporate bonds of various
ratings:
Rating AAA AA A BBB BB
YTM 6.19% 6.31% 6.53% 6.96% 7.58%
a. Assuming the bonds will be rated AA what will be the price of...

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
6.16%
6.38%
6.59%
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a. Assuming the bonds will be rated AA, what will be the price
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HMK Enterprises would like to raise $10 million to invest in
capital expenditures. The company plans to issue five-year bonds
with a face value of $1000 and a coupon rate of 6.5% (annual
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five-year (annual-pay) coupon corporate bonds of various
ratings:
Rating
AAA
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A
BBB
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YTM
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a. Assuming the bonds will be rated AA, what will the price of
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raise $10 million to invest in capital expenditures. The company
plans to issue five-year bonds with a face value of $1000 and a
coupon rate of 6.5% (annual payments). The following table
summarizes the yield to maturity for five-year (annual pay) coupon
corporate bonds of various ratings.
Rating
AAA
AA
A
BBB
BB
YTM
6.20%
6.30%
6.50%
6.90%
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a. Assuming the bonds will be rated
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Chapter 6
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