Question 4

HMK Enterprises would like to raise $10 million to invest in capital expenditures. The company plans to issue 5-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 5-year (annual-payment) coupon corporate bonds of various ratings:

a. Assuming the bonds will be rated AA, what will be the price of the bonds? (5 marks)

a. $856.32

b. $987.45

c. $999.66

d. $1,008.77

e. $1,019.88

b. How much of the total principal amount of these bonds must HMK issue to raise $10.0million 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.) (5 marks)

a. $5,605,000

b. $6,322,000

c. $7,243,000

d. $8,803,000

e. $9,914,000

c. What must be the rating of the bonds for them to sell at par? (5 marks)

1. AAA grade

2. AA grade

3. A grade

4. BBB grade

5. BB grade

d. Suppose that when the bonds are issued, the price of each bond is $958.38. What is the likely rating of the bonds? Are they junk bonds? (5 marks)

1. AAA grade, they are not junk bonds

2. AA grade, they are not junk bonds

3. A grade, they are not junk bonds

4. BBB grade, they are junk bonds

5. BB grade, they are junk bonds