Question

3/4

ANNUAL CUPON

An investor looks at today's yield to maturities in the Wall Street Journal for debt with 10 year maturities. He observes the following: Rating AAA АА BBB BB YTM 4.49% 4.60% 4.75% 4.95% 5.15% Exxon Mobil (XON) has debt that is AAA rated. Suppose an investor wants to value Exxon bonds that will mature in 10- years. He sees one Exxon bond that pays a 7.875% annual coupon with a face value of $1,000. Bond prices are often quoted as a percentage of $100 face value increments. How would you quote your results from Part A? (express answer as a percentage, xx.xx%, of par) Submit Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924)) Many companies look to re-finance their outstanding debt when interest rates fall significantly. Javert Toy Company has $50.00 million in debt outstanding that pays an 9.00% APR coupon. The debt has an average maturity of 10.00 years. The firm can refinance at an annual rate of 5.25%. That is, investors want 5.25% today for bonds of similar risk and maturity. How much will Javert Toy company pay to buy back its current outstanding bonds?(answer in terms of millions, so 1,000,000 would be 1.00) Submit Answer format: Currency: Round to: 2 decimal places.

Answer 1

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Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond is calculated using PV function in Excel :

rate = 4.49% (YTM of bonds with AAA rating)

nper = 10 (Years remaining until maturity with 1 coupon payment each year)

pmt = 100 * 7.875% (annual coupon payment = face value * coupon rate)

fv = 100 (face value receivable on maturity)

PV is calculated to be $126.80

| Al x fc =PV(4.49%,10,100*7.875%, 100) B C D E F 1 ($126.80)!

Price of bond as % of par =  $126.80 / $100 = 126.80%