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 AArating?
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 $_
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 |
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