Q8PB Question:聽The yield to maturity... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 5: Q8PB (page 528)

Question:The yield to maturity for 10-year bonds is as follows for four different bond rating categories:
Aaa 9.40% Aa2 10.00%
Aa1 9.60% Aa3 10.60%
The bonds of Falter Corporation were rated as Aaa and issued at par a few weeks ago. The bonds have just been downgraded to Aa2. Determine the new price of the bonds, assuming a 10-year maturity and semiannual interest payments. (Refer to 鈥淪emiannual Interest and Bond Prices鈥� in Chapter 10 for a review if necessary.)

Short Answer

Expert verified

Answer

The price per bond is computed as $962.61

Step by step solution

Definition of Par Value

The par value is also known as the nominal value which is the face value of the bond or any other financial instrument.

Computation of price of the bond

$\begin{array}{rcl} SemiannualCoupon & = & (\frac{CouponRate}{2}) 脳 FaceValue \\ = & (\frac{0.094}{2}) 脳 1, 000 \\ = & $ 47 P r i c e p e r b o n d = CouponPayment 脳 (\frac{1 - {(1 + r)}^{- n}}{r}) + \frac{FaceValue}{{(1 + r)}^{n}} \\ = & 47 脳 (\frac{1 - {(1 + 0.05)}^{- 10 脳 2}}{0.05}) + \frac{1, 000}{{(1 + 0.05)}^{10 脳 2}} \\ = & $ 962.61 \end{array}$

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Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder鈥檚 claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder鈥檚 claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder鈥檚 claims	\)900,000
Total liabilities and stockholder鈥檚 claims	$8,500,000

In \( millions	In \) millions
Current assets	\(70	Current liabilities	\)30
Fixed assets	\(70	Long-term liabilities	\)30
		Total liabilities	\(60
		Stockholder鈥檚 equity	\)80
Total assets	\(140	Total stockholder鈥檚 equity and liabilities	\)140

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Short Answer

Step by step solution

Definition of Par Value

Computation of price of the bond

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