Mini-Case 2. The bond issues are currently selling for the Your grandfather is r

Question

Mini-Case 2. The bond issues are currently selling for the Your grandfather is retired and living on his Social Security ben- efits and the interest he gets from savings. However, the interest income he receives has dwindled to only 2 percent a year on his $200,000 in savings as interest rates in the economy have dropped. You have been thinking about recommending that he purchase some corporate bonds with at least part of his savings Young Corp Thomas Resorts Entertainment, Inc. S 973 $1,035 as a way of increasing his interest income. Specifically, you have identified three corporate bond is-What is the yield to maturity for each bond? sues for your grandfather to consider. The first is an issue from the Young Corporation that pays annual interest based on a 7.8 3. Given your estimate of the proper discount rate your estimate of the value of each of the bonds? the prices recorded above, which issue do you thi attractively priced? percent coupon rate and has 10 years before it ond bond was issued by Thomas Resorts, and it pays 7.5 percent until it matures. The final bond issue was sold by Entertainment, Inc., and it pays an annual coupon interest payment based on a rate of 7.975 percent and has only 4 years until it matures. All three bond issues have a $1,000 par value. After looking at the bonds' default risks and credit ratings. you have very different yields to maturity in mind annual interest and has 17 4. How would the values of the bonds change if the required yield to maturity on a comparable-risk b creases 3 percentage points or (ii) decreases 3 p points? Which of the bond issues is the most se changes in the rate of interest? for the three bond issues, as noted below . What are some of the things you can conclude f Before recommending any of these bond issues to your grandfather, you perform a number of analyses. Specifically computations? which of the bonds (if any) would you recomme grandfather? Explain. you want to address each of the following issues: 1. Estimate an appropriate market's required yield to maturity for each of the bond issues using the credit spreads reported in Table 9.4

Explanation / Answer

Part - 1

Calculation on Yield to Maturity (YTM)

YTM = Interest +Amortisation/Average Price

Young Corp =78+1030-1000/10

_______________

1030+1000/2

=81/1015*100

=7.98%

Thomas Resorts =75+(973-1000)/17

_______________

973+1000/2

=7.44%

Entertainment Inc = 79.75+1035-1000/4

_________________

1000+1035/2

=8.70%

Part -B

Value of Bond

Young Corp

Thomos Resorts

Entertainment Inc

Part - C

1. All the Bond Value Same Price (i.e 1,000)

2.Attractive period is Entertainment Inc because is only 4 years ,Young Corp is 10 years and Thomas Resorts is 17 Years

Part - d

If Yield Decreases 3% then Bond Price

Thomos Resorts

Entertainment Inc

Part - E

Thomos Resorts is hightest bond Value compare to Young corp and Entertaiment Ince

  

Particulars Year Cashflow PVF @ 7.98% DCF Interest 1-10 78 6.7161 523.86 Maturity 10 1030 0.4641 478.02 Total 1001.88

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