CHAPTER 9 Debt Valuation and Interest Rates 299 Mini-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 his $200,000 in savings as interest rates in the purchase some income he receives has dwindled to only 2 percent a year on $1,030 973 economy have dropped. You have been thinking about recommending that he corporate bonds with at least part of his savings Entertainment, Inc. $1,035 What is the yield to maturity for each bond? your estimate of the value of each of the bonds? In light of as a way of increasing his interest income. Specifically, you have identified three corporate bond is- sues for your grandfather to consider. The first is an issue from the Young Corporation that pays annual interest based on a 7.8 percent coupon rate and has 10 years before it matures. The sec- ond bond was issued by Thomas Resorts, and it pays 7.5 percent annual interest and has 17 years until it matures. The final bond issue was sold by Entertainment, Inc., and it pays an annual coupon interest payment based on a rate of 7.975 percent and has only 4 years until it matures. All three bond issues have a $1,000 par value. After looking at the bonds' default risks and credit ratings, you have very different yields to maturity in mind 3. Given your estimate of the proper discount rate, what is Ththe prices recorded above, which issue do you think is most . How would the values of the bonds change if the market's required yield to maturity on a comparable-risk bond (i) in creases 3 percentage points or (ii) decreases 3 percentage points? Which of the bond issues is the most sensitive to 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 coptations? 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 Young Corp. Resorts Inc. Coupon interest rate 7.8% 7.5% 7.975% ears to maturity Current market price 1,030 Par value $973 $1,000 $1,000 $1,035 $1,000 Bond rating