Problem 16-9 Interest rates and bond ratings [LO2] Thirty-year B-rated bonds of
ID: 2765787 • Letter: P
Question
Problem 16-9 Interest rates and bond ratings [LO2]
Thirty-year B-rated bonds of Parker Optical Company were initially issued at a 12 percent yield. After 15 years, the bonds have been upgraded to Aa2. Such bonds are currently yielding 16 percent to maturity.Use Table 16-2.
Determine the price of the bonds with 15 years remaining to maturity.
Thirty-year B-rated bonds of Parker Optical Company were initially issued at a 12 percent yield. After 15 years, the bonds have been upgraded to Aa2. Such bonds are currently yielding 16 percent to maturity.Use Table 16-2.
Determine the price of the bonds with 15 years remaining to maturity.
Explanation / Answer
Answer:
We need to calculate the price of bonds with 15 years remaining to maturity.
Current Yield to Maturity = 16% annually or 8% semi annually
Remaining life = 15 years
No of coupon payment during remaining life = 15 x 2 = 30
Par Value of Bond = $1,000
Coupon Rate = 12%
Coupon Interest Semi annual = $1,000 x 12% x 1/2 = $60
the Price of Bond = Coupon Interest x PVIFA (8%, 30) + Maturity Value x PVIF (8%, 30)
= ($60 x 11.258) + ($1,000 x 0.099)
= $675.48 + $99
= $774.48
Current pRice of the bond is $774.48