4 (Related to Checkpoint 9.3) (Bond valuation ) Pybus, Inc. is considering issui

Question

4 (Related to Checkpoint 9.3) (Bond valuation ) Pybus, Inc. is considering issuing bonds that will mature in 22 years with an annual coupon rate of 11 percent. 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 7 percent. However, Pybus is not sure whether the new bonds will receive a AA rating. If they receive an A rating, the yield to maturity on similar A bonds is 8 percent. What will be the price of these bonds if they receive either an A or a AA rating? a. The price of the Pybus bonds if they receive a AA rating will be $[]. (Round to the nearest cent) b. The price of the Pybas bonds if they receive an A rating will be $[]. (Round to the nearest cent.) 5. (Related to Checkpoint 9.2) (Yield to maturity) The market price is $1,175 for a 10-year bond ($1,000 par value) that pays 9 percent annual interest, but makes interest payments on a semiannual basis (4.3 percent semiannually). What is the bonds yield to maturity? The bonds yield to maturity is (Round to two decimal places.)

Explanation / Answer

4. Price of a bond can be calculated in an excel sheet using the formula as shown below

AA rating:

Price =PRICE(A1,A2,11%,7%,100,1) = 144.24

Here A1 contains today's date and A2 contains date 22 years from now which is a maturity date

So this price would be 144.245 * 1000/100 = 1442.45

A rating:

Price =PRICE(A1,A2,11%,8%,100,1) = 130.602

Here A1 contains today's date and A2 contains date 22 years from now which is a maturity date

So this price would be 130.602 * 1000/100 = 1306.02

5. Bonds yield can be calculated using the below formula

YTM = =YIELD(A1,A2,9%,117.5,100,2) = 6.58%

Here A1 contains today's date and A2 contains date 10 years from now which is a maturity date

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