Pybus, Inc. is considering issuing bonds that will mature in 25 years with an an

Question

Pybus, Inc. is considering issuing bonds that will mature in 25 years with an annual coupon rate of 8% Their par value will be $1,000 and the interest will be paid semiannually. Pybus is hoping to get a AA rating on its bonds, and if it does, the yield to maturity on similar AA bonds is 9.5%. However, Pybus is not sure whether the new bonds will recieve a AA rating. If they receive an A rating, the yield to maturity on similar A bonds is 10.5%. What will be the price of the bond if it receives and AA rating? An A rating? (Show would as well as answers)

Explanation / Answer

price of the bond if it receives AA rating =40PVIFA(4.75%,50)+1000PVIF(4.75%,50)= $ 857.617 price of the bond if it receives A rating =40PVIFA(5.25%,50)+1000PVIF(5.25%,50)= $ 780.34 Therefore the price of the bond will be more if it it receives an AA rating.

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