Question

Smith, Inc. is considering issuing bonds that will mature in 22 years with an annual coupon rate of 7 percent. Their par value will be $1,000, and the interest will be paid semiannually. Smith is hoping to get an AA rating on its bonds​ and, if it​ does, the yield to maturity on similar AA bonds is 12 percent. However, Smith is not sure whether the new bonds will receive an AA rating. If they receive an A​ rating, the yield to maturity on similar A bonds is 13 What will be the price of these bonds if they receive either an A or an AA​rating?

The price of the Smith bonds if they receive an AA rating will be $_

The price of the Smith bonds if they receive an A rating will be $_

Answer 1

	Current price of a bond, is the sum of the PV of the maturity
	value of the bond and the PV of periodic interest payments
	[annuity] when discounted at the YTM.
1]	The price of the Smith bonds if they receive an AA rating [Interest rate 12%] will be:
	=1000/1.06^44+35*(1.06^44-1)/(0.06*1.06^44) =	$         615.42
2]	The price of the Smith bonds if they receive an A rating [Interest rate 13%] will be:
	=1000/1.065^44+35*(1.065^44-1)/(0.065*1.065^44) =	$         567.36