Question

Rating YTM ААА 6.16% АА 6.31% ВВВ 6.96% ВВ 7.55% 6.52%

HMK Enterprises would like to raise $10 million to invest in capital expenditures. The company plans to issue 5-year bonds with a face value of $1,000 and a coupon rate of 6.52% (annual payments). The following table summarizes the yield to maturity for 5-year (annual-payment) coupon corporate bonds of various ratings:

a. Assuming the bonds will be rated AA, what will be the price of the bonds? (5 marks)

a. $856.32

b. $987.45

c. $999.66

d. $1,008.77

e. $1,019.88

b. How much of the total principal amount of these bonds must HMK issue to raise $10.0million today, assuming the bonds are AA rated? (Because HMK cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number.) (5 marks)

a. $5,605,000

b. $6,322,000

c. $7,243,000

d. $8,803,000

e. $9,914,000

c. What must be the rating of the bonds for them to sell at par? (5 marks)

1. AAA grade

2. AA grade

3. A grade

4. BBB grade

5. BB grade

d. Suppose that when the bonds are issued, the price of each bond is $958.38. What is the likely rating of the bonds? Are they junk bonds? (5 marks)

1. AAA grade, they are not junk bonds

2. AA grade, they are not junk bonds

3. A grade, they are not junk bonds

4. BBB grade, they are junk bonds

5. BB grade, they are junk bonds

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

BOND - Microsoft Excel (Product Activation Failed) - 2x E - SA Margins Orientation Size Print Breaks Background Print Area 1 Titles Page Setup 13. Width: Automatic - Gridlines Headings Height: Automatic - View View Scale: 100% Print Print Scale to Fit Sheet Options Bring Send Selection Align Group Rotate Forward - Backward. Pane - Arrange File Colors A Fonts Themes Effects Themes NJ32 NB 30 31 32 33 34 - NC for ND NINUNK NLNM NN NO NPNQ 5 NE NENG COUPON RATE FACE VALUE COUPON(S) YEARS YTM AA RATED ANS :d PRICE NH 6.52% 1000 65.2 35 6.31% 1008.77 [=PV(NH34, NH33,-NH32,-NH31)] 37 10000000 1008.77 AMOUNT TO BE RAISED ISSUE PRICE NO OF BONDS PRINCIPAL AMOUNT = ANS: 9914000 38 39 40 41 42 43 A GRADE COUPON RATE & YIELD RATE SHOULD BE THE SAME, WHICH IS HERE FOR "A" RATED BOND 44 ISSUE PRICE YTM 958.38 7.55% (=RATE(NH33,-NH32,NH45,-NH31)] AN 45 46 47 48 49 BB GRADE GIVEN A YIELD OF 7.55%. RATINGS WILL BE "BB" AND THEY ARE JUNK BONDS ► Sheet2 AFN BANKING NOTE BIDDING, UNDERWRITING EUAC AW PM LIFE LP, IP, MRP, INFLATION YIELD WARRAN Trefund bond YIELD SPOT ferences CLEAN INVOICE PRICE Sheeti | THE TU 120% - Rea 0 (+) DO 4 * 4 10 ENG 28-09-2019