For all questions, assume par value is $1,000 and semiannual bond interest payment.
1. A company in a line of business similar to Bay Path’s recently issued at par noncallable bonds with a coupon rate of 5.8% and a maturity of 20 years. The bonds were rated Aa1 by Moody’s and AA by Standard & Poor’s. What rate of return (yield to maturity) did investors require on these bonds if the bonds sold at par value?
2. Bay Path has one outstanding bond issue with a coupon of 8% which will mature in 5 years. The bond now sells for $1,141.69. What is the yield to maturity on this bond?
3. Based on your answers to questions 1 and 2 above, what coupon rate should Bay Path offer if it wants to realize $50,000,000 from the bond issue and to sell the bonds as close to par value as possible? (Ignore the cost of selling the bonds.)
4. Suppose Bay Path actually offers a coupon rate of 6% on its 20 year bonds, expecting to sell the bonds at par. What will happen to the price of a single bond with a par value of $1,000 if the required yield on the bonds unexpectedly falls to 5% or rises to 7%?
5. How much money will Bay Path realize from its $50 million bond issue if the actual yield is either 5% or 7%? (Refer to your answers to question 4. Ignore selling costs.)
6. How would the following affect the yield on Bay Path’s newly issued bonds?
a. The bonds are callable.
b. The bonds are subordinated to Bay Path’s existing bond issue.
c. The bond rating is better or worse than the Moody’s Aa1 that Bay Path anticipates.