HMK
Enterprises would like to raise $10 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 6.5% (annual payments). The following table summarizes the yield
to maturity for five-year (annual-pay) coupon corporate bonds of various ratings:
Rating
AAA AA A BBB BB
YTM 6.20%
6.30% 6.50% 6.90% 7.50%
• a.
Assuming the bonds will be rated AA, what will the price of the bonds be?
• b. How
much total principal amount of these bonds must HMK issue to raise $10 million
today, assuming the bonds are AA rated? (Because HMK cannot issue a fraction of
a bond, assume that all fractions are rounded to the nearest whole number.)
• c. What
must the rating of the bonds be for them to sell at par?
• d.
Suppose that when the bonds are issued, the price of each bond is $959.54. What
is the likely rating of the bonds? Are they junk bonds?
TUTORIAL PREVIEW
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a.
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Price of the bonds:
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Rate =
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6.30%
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Nper =
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5
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PMT =1,000 x 6.5% =
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65
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File name: HMK Enterprises.xlsx File type: xlsx PRICE:$8
