Question content area top

Part 1

HMK Enterprises would like to raise

$10.0

million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of

$1,000

and a coupon rate of

6.52%

(annual payments). The following table summarizes the yield to maturity for five-year (annual-payment) coupon corporate bonds of various ratings:

Rating	AAA	AA	A	BBB	BB
YTM	6.16%	6.36%	6.52%	6.95%	7.57%

a. Assuming the bonds will be rated AA, what will be the price of the bonds?

b. How much of the total principal amount of these bonds must HMK issue to raise

$10.0

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 be the rating of the bonds for them to sell at par?

d. Suppose that when the bonds are issued, the price of each bond is

$957.60.

What is the likely rating of the bonds? Are they junk bonds?

Question content area bottom

Part 1

a. Assuming the bonds will be rated AA, what will be the price of the bonds?

The price of the bonds will be

$734.70734.70.

(Round to the nearest cent.)

Part 2

b. How much of the total principal amount of these bonds must HMK issue to raise

$10.0

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.)The number of bonds to be issued is

enter your response here.

(Round up to the nearest integer.)

Part 3

c. What must be the rating of the bonds for them to sell at par?(Select the best choice below.)

A.For the bonds to sell at par, the coupon must equal the yield. Since the coupon is

6.36%,

the yield must also be

6.36%,

or A rated.

B.For the bonds to sell at par, the coupon must equal the yield. Since the coupon is

6.52%,

the yield must also be

6.52%,

or BBB rated.

C.For the bonds to sell at par, the coupon must equal the yield. Since the coupon is

6.95%,

the yield must also be

6.95%,

or BBB rated.

D.For the bonds to sell at par, the coupon must equal the yield. Since the coupon is

6.52%,

the yield must also be

6.52%,

or A rated.

Part 4

d. Suppose that when the bonds are issued, the price of each bond is

$957.60.

What is the likely rating of the bonds? Are they junk bonds?(Select the best choice below.)

A.Given a yield of

6.95%,

it is likely these bonds are rated BBB. Yes, BBB-rated bonds are junk bonds.

B.Given a yield of

6.95%,

it is likely these bonds are rated BBB. No, BBB-rated bonds are not junk bonds.

C.Given a yield of

7.57%,

it is likely these bonds are rated BB. No, BB-rated bonds are not junk bonds.

D.Given a yield of

7.57%,

it is likely these bonds are rated BB. Yes, BB-rated bonds are junk bond