Question

Pybus, Inc. is considering bonds that will mature in 16 years with an annual coupon rate of 7 percent. Their par value will be $1,000, and the interest will be paid semiannually. Pybus is hoping to get a AA rating on its bonds and, if it does, the yeield to maturity on similar AA bonds is 9.5 percent. However, pybus is not sure whether the new bonds will receive a AA rating. If they receive an AA rating, the yield to maturity on similar A bonds is 10.5 percent. What will be the price of these bonds if they receive either an a or a AA rating? a

Answer 1

Price is ascertained using the PV function of Excel.

Price, if the rating is AA = $796.447750

Price, if the rating is A= $731,495977

Detailed working, with function arguments as follows:

Clipboard Font Alignment D10 for =PV(D9/2,D7, D8, D2) A 1 Formula Rating AA Rating A 2 Face Value (FV) Given FV $1,000 $1,000 3 Coupon rate (R) Given 7% 7% 4 Interest frequency Given Semiannual Semiannual 5 Number of coupon payments a year (n) 2 2 6 Time to maturity (no. of years) (N) Given 16 16 7 Number of future coupon payments (t) N*t Nper 32 32 8 Amount of coupon payment FV*R/n PMT $35 $35 9 Interest rate (YTM) Given Rate 9.50% 10.50% 10 Price (Present value) PV (796.447750)|(731.495977) 11

שוםששום E10 fx =PV(E9/2,57,58,E2) B C Formula 2 Face Value (FV) Given FV 3 Coupon rate (R) Given 4 Interest frequency Given 5 Number of coupon payments a year (n) 6 Time to maturity (no. of years) (N) Given 7 Number of future coupon payments (t) N*t Nper 8 Amount of coupon payment FV*R/n PMT 9 Interest rate (YTM) Given Rate 10 Price (Present value) PV 11 DE Rating AA Rating A $1,000 $1,000 7% 7% Semiannual Semiannual 2 2 16 16 32 $35 $35 9.50% 10.50% (796.447750) (731.495977!