Question

(Related to Checkpoint 9.3) (Bond valuation) Pybus, Inc. is considering issuing bonds that will mature in 20 years with an annual coupon rate of 8 percent. Their par value will be $1 000, and the interest will be paid semiannually. Pybus is hoping to get a AA rating on its bonds and, if it does, the yield to maturity on similar AA bonds is 9 percent. However, Pybus is not sure whether the new bonds will receive a AA rating. If they receive an A rating, the yield to maturity on similar A bonds is 10 percent. What will be the price of these bonds if they receive either an A or a AA rating?

Answer 1

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Price of bond with A rating.
we have to use financial calculator to solve this problem
Put in calculator
FV		1000
PMT	=1000*8%/2	40
I	10%/2	5%
N	20*2	40
Compute PV		($828.41)
therefore bond price =			$828.41
Price of bond with AA rating.
						we have to use financial calculator to solve this problem
Put in calculator
FV		1000
PMT	=1000*8%/2	40
I	9%/2	4.5%
N	20*2	40
Compute PV		($907.99)
therefore bond price =			$907.99