Pybus, Inc. is considering issuing bonds that will mature in 16 years with an an
ID: 2781057 • Letter: P
Question
Pybus, Inc. is considering issuing bonds that will mature in 16 years with an annual coupon rate of 8 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 10 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 11 percent. What will be the price of these bonds if they receive either an A or a AA rating?
Explanation / Answer
In case Pybus bonds get AA rating:
N = 16 years
Semi Annual Periods = 16 * 2 = 32 Semi Annual Periods
FV = 1,000
Interest rate = 10%
Semi Annual Rate = 5%
Annual Coupon Rate = 8%
Semi Annual Coupon Payment = 40
Using FInancial Calculator:
PV = 841.97
In case Pybus bonds get A rating:
N = 16 years
Semi Annual Periods = 16 * 2 = 32 Semi Annual Periods
FV = 1,000
Interest rate = 11%
Semi Annual Rate = 5.5%
Annual Coupon Rate = 8%
Semi Annual Coupon Payment = 40
Using FInancial Calculator:
PV = 776.44
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