Question

***TWO PARTS TOTAL, BE CAREFUL BECAUSE RATE CHANGES FROM 90% TO 93% IN THE SECOND PART***

A company is trying to estimate the cost of debt for a new project. For their estimate, they will find the yield to maturity on existing company bonds. They have one outstanding bond issue at the moment that will mature in 15.00 years. The bond pays an annual coupon of 9.00%, with a face value of $1,000. The bond currently trades at 90.00% of face value. What is the yield to maturity on the existing debt? 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)) A company is trying to estimate the cost of debt for a new project. For their estimate, they will find the yield to maturity on existing company bonds. They have one outstanding bond issue at the moment that will mature in 15.00 years. The bond pays an annual coupon of 9.00%, with a face value of $1,000. The bond currently trades at 93.00% of face value. What coupon rate will the company have to place on new debt to sell near par value? 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))

Answer 1

Ques-1)

Calcualting the YTM of exising Debt using EXCEL function:-

15 90 No of Payments Payment Amount Face Value (Future Value) Current Price (Present Value) 1000 -900 Rate 10.34% Rate Function- #=RATE(G3, G4,G6, G5,0)

SO, YTM is 10.34%

Ques-2)

Calcualting the YTM of new Debt using EXCEL function:-

15 90 No of Payments Payment Amount Face Value (Future Value) Current Price (Present Value) 1000 -930 Rate 9.92% Rate Function- #=RATE(G3, G4,G6, G5,0)

as YTM is 9.92%, the company must have Coupon rate as 9.92% to sell Bond at Par Value.

As when Coupon rate and YTM are same, Price of Bond is same as Par Value