Question
Ventura has provided the explanation how to get the answer to problem 2 in the discussion board.I came up with the same thing as him.Just
Ventura has provided the explanation how to get the answer to problem 2 in the discussion board.I came up with the same thing as him.Just waiting on Dr. Steadman to confirm.
Lets start working on part I.
I. To help the company decide on how best to proceed, your Group has derived the following table that summarizes the current financial market yield to maturity for five-year (annual payments) coupon corporate bonds of various ratings:
RatingAAAAAABBBBB
YTM6.20%6.30%6.50%6.90%7.50%
a.if Standard & Poor's or Moody's puts a rating on the HMK bonds as AA, what will the price of the HMK bonds be when issued to investors?
b.to raise the $10M needed, how much total principal amount of these bonds must HMK issue to raise the money today, if the bonds are in fact rated AA?(assume that any fraction of a bond is rounded off to the nearest whole number)
c.what must the rating of the HMK bond be for them to sell at par?
d.suppose that when the bonds are issued, the price of each bond ends up at $959.54.Is this a discount bond or a premium bond?What do you think would be the likely rating of the bonds?Is it possible that your Group could advise management that this would basically be nothing more than the issuance of junk bonds by HMK?Would this be a good or bad thing to do, in your opinion, relative to the overall cost of capital to finance this investment?Why?
e.in discussing this with Mr. Moneypockets, the CFO, will you explain that the cost of the bonds to the corporation (assuming no financing costs that might be paid to an Investment Banker) could be greater or less than the coupon rate?In this case, based on your answer to part d., which would it be? What factors, such as riskiness of cash flows from the potential investment or the current debt load of HMK, might contribute to your explanation?
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