Rank the following bonds in order from lowest credit risk to highest risk all wi

Question

Rank the following bonds in order from lowest credit risk to highest risk all with the same lime to maturity. by their yield to maturity. (Rank: 1= lowest, 4 = highest) Treasury bond with yield of 5.40 percent United Airline bond with yield of 6.50 percent Bank of America bond with a yield of 9.32 percent Hewlett -Packard bond with yield of 7.03 percent Compute the price of a 6.5 percent coupon bond with ten years left to maturity and a market interest rate of 9.0 percent. (Assume interest payments are semiannual ) (Do not round Intermediate calculations and round your final answer to 2 decimal places.) Bond price $ Is this a discount or premium bond? Premium bond Discount bond Calculate the price of a 5.8 percent coupon bond with 10 years left to maturity and a market interest rate of 7.0 percent (Assume interest payments are semiannual ) (Do not round Intermediate calculations and round your final answer to 2 decimal places.) Bond price $1 Is this a discount or premium bond? Premium bond Discount bond

Explanation / Answer

Ranking of Bonds according to lowest credit risk:

B.

Price of a bond is the Present Value of All coupon Payment that will be recieved during the Life time of the Bond plus Maturity value received, discounted at the present Market Rate.

Total Coupon Payment Receivable: 6.5 / 2 = 3.25 Per Payment Period for 10 Years so, total 20 Coupon Payment.

PV of Coupon Payment: 3.25 x 9.1285 = 29.667625

Maturity Amount Receivable: 100 x 0.42241093 (PV Factor at 9% for 10 Years) = 42.241093

Total: 71.908718 or Bond Price = 71.91

Bond is a Discount Bond, because selling at a price below Face Value.

C.

Price of a bond is the Present Value of All coupon Payment that will be recieved during the Life time of the Bond plus Maturity value received, discounted at the present Market Rate.

Total Coupon Payment Receivable: 5.8 / 2 = 2.90 Per Payment Period for 10 Years so, total 20 Coupon Payment.

PV of Coupon Payment: 2.90 x 10.5940 = 30.7226

Maturity Amount Receivable: 100 x (PV Factor at 7% for 10 Years) = 50.834929

Total: 81.557529 or Bond Price = 81.56

Bond is a Discount Bond, because selling at a price below Face Value.

Rank Bond 1 Treasury Bond with Yield of 5.40 Percent 2 United Airline Bond with Yield of 6.50 Percent 3 Hewlett Packard Bond with Yield of 7.03 Percent 4 Bank of America Bond with a Yield of 9.32 Percent

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