Problem 6 Mrs. Hudson's Kitchen (MHK) is a firm specializing in frozen puddings and pies. To raise funds for expansion, the company plans to issue $300 million worth of 20 -year, semi-annual payment coupon bonds. Each bond has a par value of $1000. Due to its astute financial management, S&P has assigned an AA rating to the company and its outstanding issues. MHK has retained the investment bank, Sullyman Brothers, to advise on the bond issue. Sullyman Brothers has provided the following information. All numbers are on a per annum basis. The default premiums for AAA, AA and A rated companies are 0.5%,0.6% and 0.8% respectively. The secondary market for MHK bonds is not very liquid since most investors buy and hold till maturity. MHK has to offer a 0.11% premium for the poor liquidity of its bonds. Investors require an additional 0.4% if the debt is callable. If the debt has a convertible option, the yield can be lowered by 0.3%. The yield on 20 -year Treasury bonds is currently 8%. No tax adjustment is required. Parta: MHK has decided to issue 20 -year bonds without any callable or convertible features. What is the yield required by investors? Part b: MHK issued the bonds at par with a coupon rate of 8.71%. Two years have passed since the bonds were issued. The Food and Drug Administration (FDA) found traces of harmful carcinogens in MHK's frozen puddings and pies. As a result, angry consumers filed a class action lawsi'yt against MHK. The negative publicity has slashed sales by 50% and MHK's suppliers have tightened credit terms. In view of these events, S\&P has downgraded MHK to a B rating. Investors now demand a default premium of 1.20%. US Treasury bonds with 18 years till maturity is yielding 8.15%. Compute the yield required by investors. What is the price of an MHK bond now (to 2 decimal places)