The yield to maturity for 20-year bonds is as follows for four different bond ra
ID: 1170784 • Letter: T
Question
The yield to maturity for 20-year bonds is as follows for four different bond rating categories. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
The bonds of Falter Corporation were rated as Aa1 and issued at par a few weeks ago. The bonds have just received a new rating of Aaa. Determine the new price of the bonds, assuming a 20-year maturity and semiannual interest payments. (Do not round intermediate calculations and round your answer to 2 decimal places.)
The yield to maturity for 20-year bonds is as follows for four different bond rating categories. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Explanation / Answer
The Bonds were issued at the rate of Aa1 i.e., 10.20% annually or 5.1% semi annual. By Upgrading to Aaa, the new yield to maturity is 10% or 5% semiannually.
1. Present value of interest payments
Present value of interest payments = Interest × PVIFA(n = 40, i = 5%)
Present value of interest payments = $51 × 17.159
Present value of interest payments = $875.11
2. Present value of principal payment at maturity
Present value of principal = FV × PVIF(n = 40, i = 5%)
Present value of principal = $1,000 × 0.142 = $142
3. Price of Bond = Present Value of Interest + PV of Principal = $875.11 + $142 = $1017.11
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