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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

01

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.

02

Computation of price of the bond

SemiannualCoupon=CouponRate2脳FaceValue=0.0942脳1,000=$47Priceperbond=CouponPayment脳(1-1+r-nr)+FaceValue(1+r)n=47脳(1-1+0.05-10脳20.05)+1,000(1+0.05)10脳2=$962.61

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Most popular questions from this chapter

Preston Corporation has a bond outstanding with an \(80 annual interest payment, a market price of \)1,250, and a maturity date in 10 years. Assume the par value of the bonds is $1,000. Find the following:

a.The coupon rate.

b.The current rate.

c.The yield to maturity.

Question:Cox Media Corporation pays an 11 percent coupon rate on debentures that are due in 10 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,110. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds.

a. Find the market value of the bonds using semiannual analysis.

b. Do you think the bonds will sell for the price you arrived at in part a? Why?

Solar Energy Corp. has $4million in earnings with 4 million shares outstanding. Investment bankers think the stock can justify P/E ratio of 21. Assume the underwriting spread is 5 percent. What should the price to the public be?

Question: I. B. Michaels has a chance to participate in a new public offering by Hi-Tech Micro Computers. His broker informs him that demand for the 700,000 shares to be issued is very strong. His broker鈥檚 firm is assigned 25,000 shares in the distribution and will allow Michaels, a relatively good customer, 1.3 percent of its 25,000 share allocation. The initial offering price is \(30 per share. There is a strong aftermarket, and the stock goes to \)32 one week after issue. The first full month after issue, Mr. Michaels is pleased to observe his shares are selling for \(33.50. He is content to place his shares in a lockbox and eventually use their anticipated increased value to help send his son to college many years in the future. However, one year after the distribution, he looks up the shares in The Wall Street Journal and finds they are trading at \)28.50.

c. Why might a new public issue be expected to have a strong aftermarket?

Question:Twenty-five-year B-rated bonds of Parker Optical Company were initially issued at a 12 percent yield. After 10 years the bonds have been upgraded to Aa2. Such bonds are currently yielding 10 percent to maturity. Use Table 16-2 to determine the price of the bonds with 15 years remaining to maturity. (You do not need the bond ratings to enter the table; just use the basic facts of the problem.)
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