Question

A bond's credit rating provides a guide to its price. Assume Aaa bonds yield 5.2% and Baa bonds yield 6.2%. Assume a 10% five-year bond with annual coupons and a face value of $1,000. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

a. What is the bond's price if it is rated as Aaa? Bond price $

b. What is the bond's price if it is rated as Baa? Bond price $

Answer 1

(a)-The bond's price if it is rated as Aaa

· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

· Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 10.00%]	PMT	100
Market Interest Rate or Yield to maturity on the Bond [5.20%]	1/Y	5.20
Maturity Period/Time to Maturity [5 Years]	N	5
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) will be $1,206.67.

“The Price of the Bond will be $1,206.67”

(b)-The bond's price if it is rated as Baa

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 10.00%]	PMT	100
Market Interest Rate or Yield to maturity on the Bond [6.20%]	1/Y	6.20
Maturity Period/Time to Maturity [5 Years]	N	5
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) will be $1,159.20.

“The Price of the Bond will be $1,159.20”