Two years ago, Phutki Corp. issued a $1,000 par value, 11 percent (annual paymen
ID: 2645456 • Letter: T
Question
Two years ago, Phutki Corp. issued a $1,000 par value, 11 percent (annual payment) coupon bond.
At the time the bond was issued it had 15 years to maturity. Currently this bond is selling for $1,000
in the bond market. Phutki Corp. is now planning to issue a $1,000 par value bond with a coupon rate
of 9 percent (semi-annual payments) that will mature 25 years from today. Assuming that the
riskiness of the new bond is the same as the previous bond (i.e., the YTM on the new bond is equal to
the current YTM on the previous bond), how much will investor's pay for this new bond?Round all dollar answers to 2 decimal places
Explanation / Answer
Currently the 11% bond is selling at $1000 in the market which is the par value of the bond. Since the bond is selling at par value, the current YTM is equal to the coupon rate of interest i.e. 11%.
As per the question, the 9% bond, which is planning to be issued by the company, will have the same YTM s that of the 11% bond. So the YTM of the 9% bond is also 11%.
The semi-annual interest = (0.09 x 1000) / 2 = $45
With semi-annual interest payment, the value of the 9% bond , which the investor will pay is,
= 45 x PVIFA (5.5%, 50) + 1000 x PVIF (5.5%, 50)
= 45 x 16.936 + 1000 x 0.069
= $ 831.12
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