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Pybus, Inc. is considering issuing bonds that will mature in 16 years with an annual coupon...

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Finance

Pybus, Inc. is considering issuing bonds that will mature in 16years with an annual coupon rate of 9 percent. Their par value willbe $1,000?, and the interest will be paid semiannually. Pybus ishoping to get a AA rating on its bonds? and, if it? does, the yieldto maturity on similar AA bonds is 11 percent. ? However, Pybus isnot sure whether the new bonds will receive a AA rating. If theyreceive an A? rating, the yield to maturity on similar A bonds is12 percent. What will be the price of these bonds if they receiveeither an A or a AA? rating?

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3.6 Ratings (321 Votes)

AA rating

                  K = Nx2
Bond Price =? [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2
                   k=1
                  K =16x2
Bond Price =? [(9*1000/200)/(1 + 11/200)^k]     +   1000/(1 + 11/200)^16x2
                   k=1
Bond Price = 851

A rating

                  K = Nx2
Bond Price =? [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2
                   k=1
                  K =16x2
Bond Price =? [(9*1000/200)/(1 + 12/200)^k]     +   1000/(1 + 12/200)^16x2
                   k=1
Bond Price = 789

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Transcribed Image Text

Pybus, Inc. is considering issuing bonds that will mature in 16years with an annual coupon rate of 9 percent. Their par value willbe $1,000?, and the interest will be paid semiannually. Pybus ishoping to get a AA rating on its bonds? and, if it? does, the yieldto maturity on similar AA bonds is 11 percent. ? However, Pybus isnot sure whether the new bonds will receive a AA rating. If theyreceive an A? rating, the yield to maturity on similar A bonds is12 percent. What will be the price of these bonds if they receiveeither an A or a AA? rating?

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