21. Removalists of Junk Inc. is issuing a new thirteen-year bond at a face value

Question

21. Removalists of Junk Inc. is issuing a new thirteen-year bond at a face value of $1,000 with a coupon rate of 14%. Coupons are semi-annual. The risk- free yield to maturity on similar term bonds trading in the market is 1.8% and Removalists of Junk has a credit spread of 7.1%, what should be the price of Removalists of Junk's bond? The annuity table provided below will assist with calculations: ANNUITY FACTORS r=0.9% r 1.8% 2.65% 3.05% 4.45% 5.3% 7.1% 8.9% n-13 12.2166 11.4994 10.8770 10.6010 9.7125 9.2262 8.3105 7.5270 26 23.0899 20.6186 18.6188 17.7744 15.2272 13.9409 11.7174 10.0117 (a) $1,573.42 (b) $1,579.47 (c) $2,408.49 (d) $1,388.29 (e) $809.78

Explanation / Answer

Required Information:

Face Value= $ 1000

Coupan amount = 14% of 1000*1/2= $70

YTM= Rf+ CS= (1.8+7.1)/2= 8.9%/2= 4.45%

No of periods= 13*2= 26

Price of bond is given by: 70*PVAF(4.45%, 26)+ 1000* PVIF(4.45,26)

=70*15.2272+1000/(1.0445)26

= 1065.90+322.39

= 1388.29

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