Question

Your firm has a credit rating of A. You notice that the credit spread for​ five-year maturity A debt is 85 basis points (0.85 % ). Your​ firm's five-year debt has an annual coupon rate of 6.5 %. You see that new​ five-year Treasury notes are being issued at par with an annual coupon rate of 1.9 %. What should be the price of your outstanding​ five-year bonds?

Answer 1

Answer:

$1,172.97

Explanation:

We use the Present value formula i.e to be shown in the attached spreadsheet. Kindly find it below:

Given that,  

Assuming figure Future value = $1,000

Rate of interest = 1.9% + 0.85% = 2.75%

NPER = 5 years

PMT = $1,000 × 6.5% = $65

The formula is shown below:

= -PV(Rate;NPER;PMT;FV;type)

So, after solving this, the price of the bond is $1,172.97