Question 4
HMK Enterprises would like to raise $10 million to invest incapital expenditures. The company plans to issue 5-year bonds witha face value of $1,000 and a coupon rate of 6.52% (annualpayments). The following table summarizes the yield to maturity for5-year (annual-payment) coupon corporate bonds of variousratings:
a. Assuming the bonds will be rated AA, what will be the priceof the bonds?
a. $856.32
b. $987.45
c. $999.66
d. $1,008.77
e. $1,019.88
b. How much of the total principal amount of these bonds mustHMK issue to raise $10.0million today, assuming the bonds are AArated? (Because HMK cannot issue a fraction of a bond, assume thatall fractions are rounded to the nearest whole number.)
a. $5,605,000
b. $6,322,000
c. $7,243,000
d. $8,803,000
e. $9,914,000
c. What must be the rating of the bonds for them to sell at par?
AAA grade
AA grade
A grade
BBB grade
BB grade
d. Suppose that when the bonds are issued, the price of eachbond is $958.38. What is the likely rating of the bonds? Are theyjunk bonds?
AAA grade, they are not junk bonds
AA grade, they are not junk bonds
A grade, they are not junk bonds
BBB grade, they are junk bonds
BB grade, they are junk bonds
