Chapter 6, Problem 29P

Summary Introduction

Bond:

Bond is a form of borrowing that shows the debt obligations of a person or a company. A fixed rate of interest is paid on the bond till maturity.

Yield to Maturity:

It is total return on a bond to a bondholder till maturity. It is depicted as an annual rate. Simply it is the rate of return on an investment.

(a)

To determine:

The price of bond.

Summary Introduction

(b)

To determine:

The total principal amount that Company HMK needs to issue.

Summary Introduction

(c)

To determine:

The rating of bond to sell them at par.

Summary Introduction

(d)

To determine:

The rating and classification of bond.

Calculate the yield to maturity to determine the rating of bond.

Given,

Face value is $1000.

Current price is $959.54.

Term to maturity is 5 years.

Formula to calculate yield to maturity is,

$YTM=\left(\frac{CPN+\frac{FV-P}{n}}{\frac{FV+P}{2}}\right)$

Where,

• YTM is the yield to maturity.
• CPN is the coupon payment
• FV is the Face value
• P is the current price
• n is term to maturity.

Calculate yield to maturity using rate function in excel.

The yield to maturity for bonds is 7.5% which means that bonds rating are BB as per the rating table given.

The bonds are junk bonds.