FIN 260 Lecture 30: Newly Issued Coupon Bonds are Priced at Face Value

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oliveyellowjacket981

13 Apr 2018

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Cont"d w/ pricing of bonds, newly issued coupon bonds are priced at face value: Ex: a company needs to raise money to build a new factory. It decides to issue debt rather than equity. The company has aa rating from moody"s & wants to issue debt that will have 10 yr. maturity. Lets assume that currently the yield to maturity on this type of debt is 8% apr (w/ semi- annual compounding). If they offer 9%, they would be paying too much. If they offer 7% no one would buy it as other bonds w/ the same risk offer higher returns. Ex: the bonds face value will be . 8%, you then receive each 6 months: q: what is the price of the bond right now, spilt the payments into 2 sections, annuity component: the payments, every 6 months, for.

Related Questions

HKM needs to raise 10 million for nancing an investment. The company plans to issue ve-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 ve year corporate bonds with the same maturity and
coupon rate (annual coupons) for various ratings of the bonds by a well known rating agency:

Rating AAA AA A BBB BB
Yield 6.20% 6.30% 6.50% 6.90% 7.50%
HKM has asked the same rating agency to give a rating for its bonds (and paid for it) but has
not yet received the rating.
(a) If the rating turns out to be AA what will the price of the bonds be?
(b) How many bonds will the company need to issue (if you nd a fraction, round to the nearest
whole number since the company cannot issue fractions of bonds)

(c) Finally when the company sells the bonds after they have been rated, the price of each bond
is $959.54.
(i) What is the yield to maturity on HKM bonds? (If you think that you are clever in the
way you are answering this question, explain what you do and why).
(ii) What is the likely rating of the bonds? Are they junk bonds?

peachhedgehog527

Jiminyâs Cricket Farm issued a bond with 15 years to maturity and a semi-annual coupon rate of 8 percent 3 years ago. The bond currently sells for 96 percent of its face value and has a yield to maturity of 8.54%. The book value of the debt issue is $60 million.

In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years left to maturity. The book value of this issue is $35 million, the bonds sell for 51 percent of par, and their yield to maturity is 6.85%.

A. What is the companyâs total book value of debt? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)

A. Total book value

B.What is the companyâs total market value of debt? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)

B. Total market value

C. The companyâs marginal tax rate is 35 percent. What is the after-tax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

C. Cost of debt

ultramarinearmadillo345

1. The following Treasury bond quote appeared in The Wall Street Journal on May 11, 2004:

9.125 May 09 100.09375 100.12500 ... â2.15

Why would anyone buy this Treasury bond with a negative yield to maturity? How is this possible?

Shanken Corp. issued a 30-year, 6.2 percent semiannual bond 7 years ago. The bond currently sells for 108 percent of its face value. The companyâs tax rate is 35 percent. (Assume that the face value of one coupon bond is $1,000.)
a. What is the pretax cost of debt?

b. What is the aftertax cost of debt?
c. Which is more relevant, the pretax or the aftertax cost of debt? Why?

The Saunders Investment Bank has the following financing outstanding. What is the WACC for the company? (Assume that the face value of one bond (for both coupon and zero-coupon bonds) is $1,000, and that semi-annual compounding is used for the zero-coupon bond.)

Debt:

Preferred stock: Common stock: Market:

60,000 bonds with a coupon rate of 6 percent and a current price quote of 109.5; the bonds have 20 years to maturity. 230,000 zero coupon bonds with a price quote of 17.5 and 30 years until maturity.

150,000 shares of 4 percent preferred stock with a current price of $79, and a par value of $100.
2,600,000 shares of common stock; the current price is $65, and the beta of the stock is 1.15.

The corporate tax rate is 40 percent, the market risk premium is 7 percent, and the risk-free rate is 4 percent.

skyotter83

FIN 260 Lecture 30: Newly Issued Coupon Bonds are Priced at Face Value

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