Question

Using the bond information below, calculate some missing value for each of the listed securities.

Issuer	Years to Maturity	Par Value	Coupon	Current Price	Payments/Year	Rating
Sears	15	$1,000	.065		2	A
Xcom	10	$1,000	None		None	BBB
Gap	12	$1,000	.08	$1,125	2	Unknown
GE	20	$10,000	.06		2	AA
Verizon	30	$5,000	.07		2	AAA
Iomega	6	$1,000	.07	$840	2	Unknown
Cisco	15	$1,000	.055		2	AAA
Wendy’s	3	$1,000	.085	$1,047	2	Unknown
US Savings Bond		$1,000	None	$500	None	AAA

What are the likely ratings for the three unknown bonds?

Why might Wendy’s and the Gap be selling at a premium? What could have happened since these bonds were issued?

Answer 1

Question 2

The bonds of Wendy & Gap are trading at a premium because their coupon rates may be more than the market rate of interest. Since the time these bonds have been issued the interest rates are likely to have decreased, hence they trade at a premium. The yield also depends on the respective ratings of the firm.

Question 1

fx X B16 н Wendy's A В C D E F G К L lomega GAP US Savings Bond 1 2 3 Number of periods per year 4 Years to maturity 5 Total number of periods Number of periods per year Years to maturity Total number of periods Number of periods per year Years to maturity Total number of periods 2 2 Maturity 20 12 6 3 Current Price 500 Maturity price Yield =B4*B3 F4*F3 14*13 1000 =RATE(L3,0,-L4 6 Par Value 7 Coupon rate 8 Coupon payment 9 Coupon payment per period 10 Current Price 11 Yield per period 12 Annual Yield 1000 Par Value 1000 Par Value 1000 Coupon rate Coupon payment Coupon payment per period Current Price Coupon rate Coupon payment Coupon payment per period Current Price 0.08 =B7*B6 0.07 =F7 F6 0.085 17 16 =1&13 B8B3 =F8F3 1125 840 1047 -RATE (1519-10. Yield per period Yield per period =RATE(B5,B9,-B10,B6)| B11 B3 =RATE[F5,F9,-F =F11 F3 Annual Yield Annual Yield 11113 13 Risk Premium Risk Premium Risk Premium 112-SL$6 B12-SL$6 =F12-SL$6 14

fix ETE X B16 A В C D F G Н K 1 Wendy's US Savings Bond GAP lomega 2 3 Number of periods per year 4 Years to maturity Number of periods per year Number of periods per year Maturity 2 2 20 Years to maturity Years to maturity Current Price 12 3 500 Total number of periods Total number of periods 5 Total number of periods 12 Maturity price 24 1000 6 Par Value 1000 Par Value Par Value 1000 Yield 3.53% 1000 7 Coupon rate 8 Coupon payment 0.085 0.08 Coupon rate 0.07 Coupon rate 80 Coupon payment 70 Coupon payment 85 9 Coupon payment per period Coupon payment per period 40 35 Coupon payment per period 42.5 10 Current Price Current Price 1125 840 Current Price 1047 11 Yield per period Yield per period Yield per period 3.24% 5.34% 3.37% 12 Annual Yield 6.48% Annual Yield 10.68% Annual Yield 6.74% 13 Risk Premium 3.22% 14 Risk Premium 2.96% 7.15% Risk Premium

For spread of 2.96%, Gap has a rating of BB+

For spread of 7.15%, Iomega has a rating of B-

For spread of 3.22%, Wendy's has a rating of BB+

The source used to convert the spread in to rating: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm