line5 FDX Co. would like to raise $15 million to invest in capital expenditures. The company plans to issue five- year bonds with a face value of $1000 and a coupon rate of 8.55% (annual payments). The following table summarizes the yield to maturity for five-year (annual-pay) coupon corporate bonds of various ratings: Ratings YTM (1) (2) Aaa 2.59% Aa 2.65% A 2.78% Baa 3.19% Ba 4.46% B 5.88% Caa 8.55% Assuming the bonds are rated "B", what will the price of the bonds be? How much total principal amount of these bonds must FDX issue to raise $15 million today, assuming the bonds are “B” rated? (Because FDX cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number which is higher.) (3) What must the rating of the bonds be for them to sell at par? (4) Suppose that when the bonds are issued, the price of each bond is equal $1179.75. What is the likely rating of the bonds? Are they junk bonds?
line5 FDX Co. would like to raise $15 million to invest in capital expenditures. The company plans to issue five- year bonds with a face value of $1000 and a coupon rate of 8.55% (annual payments). The following table summarizes the yield to maturity for five-year (annual-pay) coupon corporate bonds of various ratings: Ratings YTM (1) (2) Aaa 2.59% Aa 2.65% A 2.78% Baa 3.19% Ba 4.46% B 5.88% Caa 8.55% Assuming the bonds are rated "B", what will the price of the bonds be? How much total principal amount of these bonds must FDX issue to raise $15 million today, assuming the bonds are “B” rated? (Because FDX cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number which is higher.) (3) What must the rating of the bonds be for them to sell at par? (4) Suppose that when the bonds are issued, the price of each bond is equal $1179.75. What is the likely rating of the bonds? Are they junk bonds?
Chapter13: Long-term Liabilities
Section: Chapter Questions
Problem 3EB: Smashing Cantaloupes Inc. issued 5-year bonds with a par value of $35,000 and an 8% semiannual...
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Transcribed Image Text:ANSWERS
(1) Assuming the bonds are rated "B" the price of the bonds should be equal:
USD
(2) Assuming the bonds are rated “B" the FDX must issue:
bonds
(3) To sell the bonds at par the rating of these bonds must be:
(4) If the price of each bond is $1179.75 the bond rating must be:
and these bonds are junk: YES / NO
Transcribed Image Text:aline5 FDX Co. would like to raise $15 million to invest in capital expenditures. The company plans to issue five-
year bonds with a face value of $1000 and a coupon rate of 8.55% (annual payments).
The following table summarizes the yield to maturity for five-year (annual-pay) coupon corporate bonds of various
ratings:
Са
Ratings
YTM
Aaa
Aa
A
2.78%
Ва
3.19%
Ва
В
2.59%
2.65%
4.46%
5.88%
8.55%
(1)
Assuming the bonds are rated "B", what will the price of the bonds be?
(2)
How much total principal amount of these bonds must FDX issue to raise $15 million today, assuming the
bonds are “B" rated? (Because FDX cannot issue a fraction of a bond, assume that all fractions are rounded to the
nearest whole number which is higher.)
(3)
Suppose that when the bonds are issued, the price of each bond is equal $1179.75. What is the likely
What must the rating of the bonds be for them to sell at par?
(4)
rating of the bonds? Are they junk bonds?
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