Question

A firm issues two​-year bonds with a coupon rate of 6.9​%, 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 3.9​%. What should the price of the​ firm's outstanding two​-year bonds be per​ $100 of face​ value?

Answer 1

Answer:

The price of the bond is $104.15

Explanation:

The price of the company's new two year debt is the present value of its future cash flows.

Since the debt pays coupon semi-annually the number of  coupons payable over two years is 4 and pays par value with the fourth coupon.

Yield to maturity is 3.9%+0.8%=4.7%/2=2.35% (semi-annually)

coupon rate is 6.9%/2=3.45%

PMT=3.45%*100

PMT=$3.45

par value $100

nper=2*2=4

Using present value formula in excel

pv=(rate,nper,pmt,fv)

pv=(2.35%,4,3.45,100)

pv=$104.15