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Case Your grandfather is retired and living on his Social Security ben- 2. The bond issues are currently selling for the following efits and the interest he gets from savings. However, the interest amounts income he receives has dwindled to only 2 percent a year on his $200,000 in savings as interest rates in the economy have Young Corp. S1.030 dropped. You have been thinking about recommending that he Thomas Resorts $ 973 purchase some corporate bonds with at least part of his savings Entertainment, Inc. $1,035 as a way of increasing his interest income. Specifically, you have identified three corporate bond is- What is the yield to maturity for each bond? sues for your grandfather to consider. The first is an issue from 3. Given your estimate of the proper discount rate, what is the Young Corporation that pays annual interest based on a 7.8 percent coupon rate and has 10 years before it matures. The sec- your estimate of the value of each of the bonds? In light of ond bond was issued by Thomas Resorts, and it pays 7.5 percent the prices recorded above, which issue do you think is most annual interest and has 17 years until it matures. The final bond attractively priced? issue was sold by Entertainment, Inc., and it pays an annual 4. How would the values of the bonds change if the market's coupon interest payment based on a rate of 7.975 percent and required yield to maturity on a comparable-risk bond (1) in- has only 4 years until it matures. All three bond issues have a creases 3 percentage points or (ii) decreases 3 percentage $1,000 par value. After looking at the bonds' default risks and points? Which of the bond issues is the most sensitive to credit ratings, you have very different yields to maturity in mind changes in the rate of interest? for the three bond issues, as noted below. 5. What are some of the things you can conclude from these Before recommending any of these bond issues to your computations? grandfather, you perform a number of analyses. Specifically. 6. Which of the bonds (if any) would you recommend to your you want to address each of the following issues grandfather? Explain. 1. Estimate an appropriate market's required yield to maturity for each of the bond issues using the credit spreads reported in Table 9.4. Thomas Entertainment, Young Corp. Resorts Inc. Coupon interest rate 7.8% 7.5% 7.975% Years to maturity 10 Current market price $1,030 $973 $1,035 Par value $1,000 $1,000 $1.000 Bond rating B BBB 17 4 AA Case Your grandfather is retired and living on his Social Security ben- 2. The bond issues are currently selling for the following efits and the interest he gets from savings. However, the interest amounts income he receives has dwindled to only 2 percent a year on his $200,000 in savings as interest rates in the economy have Young Corp. S1.030 dropped. You have been thinking about recommending that he Thomas Resorts $ 973 purchase some corporate bonds with at least part of his savings Entertainment, Inc. $1,035 as a way of increasing his interest income. Specifically, you have identified three corporate bond is- What is the yield to maturity for each bond? sues for your grandfather to consider. The first is an issue from 3. Given your estimate of the proper discount rate, what is the Young Corporation that pays annual interest based on a 7.8 percent coupon rate and has 10 years before it matures. The sec- your estimate of the value of each of the bonds? In light of ond bond was issued by Thomas Resorts, and it pays 7.5 percent the prices recorded above, which issue do you think is most annual interest and has 17 years until it matures. The final bond attractively priced? issue was sold by Entertainment, Inc., and it pays an annual 4. How would the values of the bonds change if the market's coupon interest payment based on a rate of 7.975 percent and required yield to maturity on a comparable-risk bond (1) in- has only 4 years until it matures. All three bond issues have a creases 3 percentage points or (ii) decreases 3 percentage $1,000 par value. After looking at the bonds' default risks and points? Which of the bond issues is the most sensitive to credit ratings, you have very different yields to maturity in mind changes in the rate of interest? for the three bond issues, as noted below. 5. What are some of the things you can conclude from these Before recommending any of these bond issues to your computations? grandfather, you perform a number of analyses. Specifically. 6. Which of the bonds (if any) would you recommend to your you want to address each of the following issues grandfather? Explain. 1. Estimate an appropriate market's required yield to maturity for each of the bond issues using the credit spreads reported in Table 9.4. Thomas Entertainment, Young Corp. Resorts Inc. Coupon interest rate 7.8% 7.5% 7.975% Years to maturity 10 Current market price $1,030 $973 $1,035 Par value $1,000 $1,000 $1.000 Bond rating B BBB 17 4 AA