Question

Land’o’Toys is a profitable, medium-sized, retail company. Several years ago, it issued a 6.5% coupon bond, which pays interest semi-annually. The bond has a par value of $1,000 and will mature in ten years. It is currently priced in the market as $1,037.19. The average yields to maturity for 10-year corporate bonds are reported in the following table by bond rating: Bond Rating Yield (%) Bond Rating Yield (%) AAA 5.4 AA 5.7 A 6.0 BBB 6.5 BB 7.3 B 8.2 CCC 9.2 CC 10.5 C 12.0 D 14.5 Periodically, one company will purchase another by buying all of the target firm’s stock. The bonds of the target firm continue to exist. The debt obligation is assumed by the new firm. The credit risk of the bonds often changes because of this type of an event. Suppose that the firm Treasure Toys makes an announcement that they are purchasing Land’o’Toys. Due to Treasure Toy’s projected financial structure after the purchase, Standard & Poor’s states that the bond rating for Land’o’Toys bonds will change to BB.

1) Compute the current bond yield before and after the acquisition.​

Answer 1

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