Question

A firm issues two-year bonds with a coupon rate of 6.7%, paid semiannually. The credit spread for this firm's two-year debt is 0.8%. New two-year Treasury notes are being issued at par with a coupon rate of 3.1%. What should the price of the firm's outstanding two-year bonds be per $100 of face value

Answer 1

Answer:

$105.34

Explanation:

Given:

• Face value:  $100

• Coupon rate of 6.7% semiannually = 6.7%/2 = 3.35% (semi-annually)

=> Coupon payment: $100*3.35% = $3.35

• Nper: 2*2 =4

• Yield to maturity is : 3.1% + 0.8% = 3.9%/2 = 1.95% (semi-annually)

Using present value formula in excel

pv=(rate,nper,pmt,fv)

pv = (1.95%, 4, 3.35,100)

pv = $105.34

The price of the firm's outstanding two-year bonds be per $100 of face value is:  $105.34