Question

19) curity: AAA Corporate 56 AA Corporate A Corporate BBB Corporate BB Corporate ield (%): A mining company needs to raise $100 million in order to begin open-pit mining of a coal seam. The company will fund this by issuing 30-year bonds with a face value of $1,000 and a coupon rate of 6.5%, paid annually. The above table shows the yield to maturity for similar 30-year corporate bonds of different ratings. If the company's bonds are rated A, what will be their selling price? A) $1265.37 B) $1476.27 C) $1054.48 D) $843.58 ecurity: Treasry AAAooate BBB CorporateBCorporate ield (90): 5.2 The above table shows the yields to maturity on a number of two-year, zero-coupon securities. What is 2 it spread on a two-year, zero-coupon corporate bond with a BBB rating? A) 2.4% B) 2.0% C) 2.8% D) 1.6%

Answer 1

Ans.19). Option C. $1054.48 (Answer)

The only point to note here is that the market rate is taken as the yield of 'A Corporate' since the company's bonds will also be rate A.

The formulas and calculations are shown below:

F	Face value of the bond	1000
c	Coupon rate	0.065
y	Market rate (the yield of A Corporate)	0.061
t	Number of time periods till maturity (annual payments)	30
Present value of interest payments	c*F*[(1-(1+y)^-t)/y]
	(1+y)^-t	0.17
	1-(1+y)^-t	0.83
	(1-(1+y)^-t)/y	13.62
	c*F*[(1-(1+y)^-t)/y]	885.22
Present value of Face value	F/(1+y)^t
	(1+y)^t	5.91
	F/(1+y)^t	169.25
Bond price	Present value of interest payments + present value of the Face value	1054.48