HMK Enterprises would like to raise $10 million to invest in capital expenditures. The company plans to
Question:
HMK Enterprises would like to raise $10 million to invest in capital expenditures. The company plans to issue five-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 five-year (annual-pay) coupon corporate bonds of various ratings:
.png)
a. Assuming the bonds will be rated AA, what will the price of the bonds be?
b. How much of the total principal amount of these bonds must HMK issue to raise $10 million today, assuming the bonds are AA rated? (Because HMK cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number.)
c. What must the rating of the bonds be for them to sell at par?
d. Suppose that when the bonds are issued, the price of each bond is $959.54. What is the likely rating of the bonds? Are they junk bonds?
| Amount needed | 10,000,000.00 | |||||
| Maturity | 5 | |||||
| Face value | 1,000.00 | |||||
| Coupon rate | 6.50% | |||||
| Price of bonds with various ratings | AAA | AA | A | BBB | BB | |
| 1,012.57 | 1,008.36 | 1,000.00 | 983.56 | 959.54 |
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
Step by Step Answer:
a Bond rating AA 100836 b Num...View the full answer
