Your firm has a credit rating of A. You notice that the credit spread for five-year maturity A debt is 85 basis points (0.85 %
). Your firm's five-year debt has an annual coupon rate of 6.5 %. You see that new five-year Treasury notes are being issued at par with an annual coupon rate of 1.9 %. What should be the price of your outstanding five-year bonds?
1 answer:
Answer:
$1,172.97
Explanation:
We use the Present value formula i.e to be shown in the attached spreadsheet. Kindly find it below:
Given that,
Assuming figure Future value = $1,000
Rate of interest = 1.9% + 0.85% = 2.75%
NPER = 5 years
PMT = $1,000 × 6.5% = $65
The formula is shown below:
= -PV(Rate;NPER;PMT;FV;type)
So, after solving this, the price of the bond is $1,172.97
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